So You Just Had Your First Child - Now What?

We often make the point that your financial plan is not set in stone. It should be reviewed every year or with any major life change, and there is arguably no event more life-changing than the birth of your first child.

Having children changes the cadence of your day to day life in many ways that all parents are familiar with, including, but not limited to, sleep patterns, meal planning, and how we spend our free time.

Several financial changes come with having children. Expenses and budgets change, as well as managing family income after maternity leave while juggling the additional expense of daycare. By planning in advance, you can take away some (not all) of the financial stress that may come when your budget is stretched thinner than usual with increased expenses, and possibly decreases in income. Every family is different in how they plan for these changes; however, there are also three important steps that every new parent should take, regardless of their financial situation:

Reviewing Life Insurance:

Most people know that you do not purchase life insurance to protect yourself; you purchase it to protect your family. Specifically, the amount of life insurance you have should reflect what income your family depends on that you provide for the duration of time that they will be dependant on you as an income source. This concept is also referred to as the present value of your future income. If you google “how much life insurance should I have,” you’ll likely find many rules of thumb within the results such as 10 times your salary, which can be accurate, but generally, the answer is much more nuanced. As an example, for a family with a newborn where both spouses each earn $60 K annually and hold a $300 K mortgage, each parent should have enough insurance to replace their own salary for the 18-25 years that your child is dependant on you and your income, plus $300 K to allow the surviving spouse to pay off the mortgage.

The last thing a grieving spouse should have to deal with is crushing debt after losing their partner. To replace a $60 K salary, a lump sum of $900 K would be required. If you add the mortgage to this number, the total insurance requirement increases to $1.2 million, which will be needed for 20 years give or take a few. Term life insurance is generally inexpensive, but it still adds a line item to your budget. If the cost of $1.2 million is too high, you should decide how much insurance you can afford as a monthly expense. If the maximum is $80/month and that only purchases $600 K, it is still much better to have half of the proper amount than have no insurance at all.

There are ways to decrease the cost of insurance, such as purchasing one policy that pays out on the first death regardless of which spouse dies first (joint first to die) or purchasing two different policies with different terms. For example, having two separate policies for $600 K, one for 10 years and the other for 20, will decrease the cost. When the first policy drops off after 10 years, the overall insurance need will likely be less, since the mortgage and the present value of future earnings should both be lower.

Wills and Powers of Attorney:

As a young family, you may only have a jointly owned home and registered accounts, neither of which pass through a will. This could cause you to put your will on hold, however, the main reason for new parents to complete their wills is to choose a guardian for minor children. Not choosing a guardian can lead to problems if both parents were to die prematurely. As rare and unfortunate as it is, it does happen and can create a situation where multiple different parties feel that they should be the guardian, or in situations where the guardian is more obvious, having that party go through the painstaking, time-consuming process of legally establishing their guardianship status. Each parent should draft two Powers of Attorney (POAs); one for property, also known as a living will, and one for health care. In most cases, the primary POA will be a spouse, but an alternate should also be chosen. Like a will, POAs are meant to grant decision making authority to another party in the event of diminished capacity on the part of the Attorney. As a young parent, you draft a POA and choose guardians in your will, hoping the situation when it is needed never happens. Sometimes people neglect these tasks because the thought of the event where they would be needed is so depressing, but neglecting to make these arrangements has, at its worst, caused serious family disputes, and at best, inconvenience for the family members trying to establish guardianship status for a minor or apply to the court system to act as a POA.

Open a Registered Education Savings Plan:

Soon after becoming a parent, you should open an RESP. This type of account is a great way to save for your child’s future education costs. The parent will typically be the account owner, or contributor and the child is the beneficiary. Note, the child must have a social insurance number to open the account, so it is a good idea to apply for one as soon as your child is born. Parents can make contributions of $2,500 per beneficiary annually, which the government will match with a 20% contribution up to a lifetime maximum grant of $7,200. This is the only guaranteed 20% return we know of and it can go a long way towards paying for the increasing costs of post-secondary education. $2,500 matched with a $500 government grant may not seem like a lot when compared to the overall cost of a full four years of university, but when you factor in multiple years of making contributions with tax-free compound growth, RESPs can grow to over $200 K by the time your children are going to school¹. When it comes time to make withdrawals from the accounts, the grant and growth are taxed as income to the beneficiaries, which in most cases, means a very minimal amount of tax payable. In 5 Misconceptions About RESPs, we debunk the belief that these accounts are restrictive when it comes to making withdrawals, but one important point worth repeating here, is that the only requirement to make a withdrawal is that the beneficiary is enrolled in an approved post-secondary institution. In other words, withdrawals do not need to be matched dollar for dollar to expenses.

The additional expenses of children could leave you feeling like you don’t have enough money to contribute to an RESP; even if that is the case, you should still open an account as there are programs for low-income families, where money is deposited into the account by the government even if no contributions are made to attract matching grant. I know of a parent who deposited all the birthday gift money her kids have received since they were born into an RESP and part of her monthly child-care benefits. The account now has over $80 K in it for her two sons, ages 9 and 7.

Life changes often bring challenges, financial or otherwise; by taking the right steps to plan and prepare, you can create better long-term financial outcomes for you and your family.

¹Using $7,500 contributions (matched with $1,500) for three children over a 13-year timespan using a 5% rate of return, you end up with a total account value of approximately $180,000. Grant would have been exhausted at this point, but in an additional 5 year, the $180 K would grow to $240,880