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Financial advice for young families: take baby steps to reach big goals

06 October 2015 by National Bank
Financial advice for young families: take baby steps to reach big goals

The arrival of a first born disturbs our schedules, interrupts our sleep, and takes a big bite out of our budgets.

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According to the Fraser Institute1, meeting a child’s basic needs costs from $3,000 to $4,500 per year in Canada. This can rapidly escalate to over $10,000 for higher income families, and many new expenses crop up before the baby arrives. Numerous strategies are available to both young and more experienced parents, for ensuring their children’s future. Three families share their household budgeting tips with us.

How newborns impact day-to-day expenses

Francis and Christelle are the parents of baby twins. “My biggest surprise,” admits Christelle, was the high cost of baby formula.” With two new mouths to feed, it costs them nearly $60 a week to feed their twins.

For Élizabeth, major expenses cropped up before the baby was born, not after.“The nursery furniture, stroller and car seat were the most expensive items,” recalls the young mother who is currently pursuing her studies. Since she is still living with her parents, her current expenditures are manageable, but she still has to find room in her budget for such basic items as diapers and baby clothes. “The baby is growing so fast, I’m always buying new clothes,” she continues. As the children continue to grow, new expenses appear, the most important being food and day care costs, the latter of which can vary depending upon whether or not the child is in a government-subsidized daycare centre. The daily rate also depends upon the family income, since government subsidies cover part of the costs. For two parents, each earning $50,000 a year, with one child in a private day care at $35 a day, their net daycare payment is $9.09, according to figures provided by the Québec Department of Finance.

This is over and above such items as insurance premiums, toys, day camp, sports activities, dentist and additional medical expenses, not to mention school expenses. Money also has to be found in the budget for school supplies, pedagogical days and transport. Parents have to expect the unexpected and may sometimes find it hard to keep track of their spending. One of the challenges they face is trying to take a longer view and planning for the future. A sensible budget makes it easier to plan for post-secondary studies and put money aside for a rainy day.

Helping parents balance their budgets

Once parents have a firm understanding of the expense involved in raising a growing family, they need a household budget to help them when emergencies arise.

Balancing the budget is even harder if parents are working less at a time when their expenses are increasing: some opt to work part time for a while when a new child arrives. Others use up parental leave so their children can enjoy the luxury of having one parent at home as long as possible.

Christelle enjoyed 50 weeks of parental leave under the Quebec Parental Insurance Plan, which paid her the equivalent of 70% of her salary in the first months and 55% during the second half of her maternity leave3. Even so, she still had to cut expenses: “With two young children, we shop the sales now, so when a store is running a promotion, we will buy extra,” she admits.

Student parents like Élizabeth also benefit from the Québec government’s loan and bursary program which provides them with easier access to financial assistance for continuing their studies. Andréanne Moreau lives with her husband and three children, ages 14, 9 and 1 year old. Her husband already had three children (one of whom has now left home) before they decided to have another child together. She is therefore used to the compromises and budgeting that family life demands. “The best strategy is having plenty of provisions on hand, especially food items,” she advises. “I also buy used clothing, mainly for the baby.”

There are many ways to economize: limiting restaurant outings, repairing items instead of replacing them, or even re-thinking the cable bill. We often pay for services we aren’t even using, and frequently under-estimate incidental expenses, even though they can take a big bite out of our budgets!

And lastly, we have to make sure our financial planning isn’t overly ambitious. Financial advisors are well aware that a budget you can’t follow isn’t going to be much good. Obviously, coming up with a reasonable family budget is a big challenge. There are, however, many ways of economizing and lots of resources available to parents. Solid planning enables parents to focus on their children’s future needs.

Savings for small families

Simply balancing your budget is a victory, in and of itself, and is the first step to starting to set money aside. Saving is always a good idea, even if it’s only to have a financial cushion to fall back on.

Even though we know how important it is to save for the future, many households still don’t save enough. Despite a slight increase following the economic crisis of 2008, the savings rate in Québec remains low. According to data compiled by CIRANO4 Quebeckers only managed to put aside 2.7% of their disposable income in 2013. That’s two and a half times less than Americans and five times less than we managed to put aside in 19814. On the other hand, more people are saving for their children’s education. In Québec, 42% of students under 17 receive grants through the Canada Education Savings Grant5 including the sons of Nancy Savoie and her husband Sylvain. “We used the family allowance cheques to cover our children’s needs,” they explain, “and once they hit high school, we began to invest that money in an RESP.”

Education savings plans are an especially sound financial choice, since you immediately receive 30% back in the form of federal and provincial grants. If you have an RESP family plan, you can also transfer your investment from one child to another.

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The key to successful saving: start early

An investment that earns 4.5% annually will increase in value by 55% within 10 years. If it is cashed in after 20 years, it earns yields of 141%, which is the beauty of accrued interest. That was what convinced Nancy and Sylvain to begin saving for their retirement while still in their twenties. They recently took out a second mortgage on their home to pay for renovations and invest in their RRSPs. This option allows them to benefit from low mortgage rates while reducing their taxable income.

Both young and more seasoned parents need to be highly organized and resourceful to manage their family’s finances. But it’s not an impossible goal. Not to mention that a happy family life is worth all those hours of planning. 

Government of Canada, 2014 Annual Statistical Review http://www.edsc.gc.ca/fr/rapports/pcpepcee/pcee2014.page

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