The article “What to expect (financially) when you’re expecting” was originally published in Financial Post on September 20, 2021. PHOTO BY CHLOE CUSHMAN/NATIONAL POST ILLUSTRATION FILES
New parents have a lot to learn and these financial considerations can help families feel a bit more prepared.
I am a father of three from a family of three kids. I have eagerly waited for nearly 12 years since my last child was born to become an uncle. I am a proud step-uncle of two nieces and two nephews, but now my brother and his wife are about to welcome their first child.
Before my oldest son was born, I was given a copy of Heidi Murkoff and Sharon Mazel’s best-seller, What to Expect When You’re Expecting. There is a lot to learn for new parents and a pregnancy guide is one way to get prepared. Couples also have a lot of financial considerations when they are expecting, so here are a few for my brother, his wife, and the other expecting or new parents out there.
Daycare and activities
The big cost that most parents dread is that of daycare. The Canadian Centre for Policy Alternatives reported median monthly infant fees in 2019 ranging from $179 in Quebec — where subsidized daycare is available at a cost of $8.50 per day — to $1,774 in Toronto. Fees were reported as $1,112 in Vancouver, $1,300 in Calgary, $651 in Winnipeg and $750 to $1,000 in most maritime cities.
Child-care costs are often higher for infants than toddlers. Parents with multiple children in daycare may find their daycare fees more than their mortgage payment. Full-time daycare generally turns into part-time daycare after kindergarten, but decreased daycare costs may be quickly replaced by children’s activities.
Soccer or swimming may not be the biggest financial commitments, but more expensive sports like gymnastics or hockey can really add up — sometimes costing $5,000 or more per year. As kids get older, parents need to budget for camps as well which are often necessary so that they can work while kids are out of school. They can run from $100 to $1,000 per week or more.
Benefits and RESPs
The federal government provides an Automated Benefits Application service to apply for child and family benefits when registering the birth of a child. The Canada Child Benefit is the primary federal benefit for new parents. It is administered by the Canada Revenue Agency and can be as much as $6,833 per year per child tax-free. The benefit depends upon how many children you have and their age, your marital status and your family income. Each province and territory offers additional child and family benefits as well, which are typically based on income-tax filings and family income.
Parents who use the federal government Newborn Registration Service to complete their child’s birth registration can also apply for their Social Insurance Number (SIN) at the same time. Although it is not mandatory until a child begins to work, a SIN is needed to open a Registered Education Savings Plan (RESP).
A RESP can be used to save for post-secondary education like college or university on a tax deferred basis. Parents do not get a tax deduction like when they contribute to their RRSP, but the investments also grow tax deferred. The federal government chips in 20 per cent of contributions up to $2,500 per year with a matching grant called the Canada Education Savings Grant. There may be other federal or provincial RESP grants as well, typically phased out for those with higher family incomes.
A child can have multiple RESPs, so it is not uncommon for parents and grandparents to open these accounts. New parents should beware two common RESP mistakes. One is to open a scholarship-style plan instead of a traditional RESP. Scholarship plans are often marketed by providers whose fees are relatively high compared to an RESP at a bank or investment company.
A second mistake is to prioritize a RESP over other options. Most parents will have tax rates higher than 20 per cent, meaning RRSP contributions will generate larger tax refunds than the matching grants for RESP contributions. Parents with consumer debt such as credit cards or unsecured lines of credit should probably prioritize those over saving for tuition costs that are almost 20 years away.
Insurance becomes even more important when a baby is born. A couple should consider their life insurance needs when they are becoming parents. Many employees have group life insurance at work, but the dollar amount is often insufficient to protect a young family. Parents may need to consider additional private life insurance coverage, the goal of which would be to replace the income of the deceased and ensure the family could maintain the same standard of living.
Disability insurance can provide a monthly income if a worker becomes disabled and cannot work. Some employees have no group coverage, and those who have workplace disability plans may not have their full income covered or may have limited coverage after two years of disability.
Some parents get life insurance for their children when they are young. Insurance companies often assert that coverage is cheaper the earlier you get it, and this is true. However, a newborn may not have financial dependents of their own for 30 or more years, or ever, for that matter. If a parent does not have their RRSP, TFSA and RESP maxed out, or has debt, there may be better ways to allocate extra cash flow than paying insurance premiums for a baby.
Insurance policies, RRSPs, TFSAs and pensions can have named beneficiaries. People often name their spouse and sometimes name their children as contingent beneficiaries. This seems prudent at first, but if a child was to inherit as a beneficiary while a minor, these funds would be held in trust until they attained the age of majority. The policy, account, or plan may not allow the naming of a trustee, so the proceeds could end up managed by the province or territory unless someone applies to become trustee.
A more prudent approach may be to name the contingent beneficiary as “estate,” so that the funds would be dealt with under the terms of your will.
Wills and trustees
The birth of a first child is a definite triggering event to prepare or update a will, which should include a testamentary trust clause for any inheritance to be held in trust for a minor child.
A trustee can be appointed in your will to make investment decisions and to use the funds to pay for the child’s expenses. Monies held in trust for a child are often distributed to them at the age of majority, or possibly in tranches at different ages like 20, 25, and 30, for example.
A trustee is often also named as the guardian of a child in a will in the event both of their parents predecease. Guardianship of a child can be a contentious issue for some new parents that is often cited as a reason for not preparing a will. Parents should know that a guardian named in a will is just a wish, and not legally binding.
There is a lot to expect when you are expecting — not the least of which is the immense joy a child will bring to the lives of family and friends of the parents. I am overjoyed to welcome my nephew to our family. But the financial planner in me cannot help but think about some of the financial considerations of becoming a parent and how best to be prepared. I hope my advice for my brother and sister-in-law is equally helpful for other parents as well.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.