Baby Budget: Reviewing your finances while waiting for baby
The arrival of a baby is an opportunity to review not only your budget, but also your retirement savings plans and insurance coverage.
How to budget for the arrival of a baby
The birth of a child will mean new expenses. Take the time to review your budget accordingly. Don’t worry—you’ll probably be going out less and taking fewer trips for a while, so you may still be able to balance things.
Your budget should also include an income column. At birth, parents usually take parental leave to care for the newborn child, which in most cases means a drop in income. You can get your finances in shape before baby arrives.
How much does a baby cost?
Baby-related costs vary widely. Some parents will want all new baby gear, while others will gladly take loaners and hand-me-downs. The important thing is to be well prepared to avoid unexpected expenses, even if some are unavoidable.
Here are the main categories of expenses you will need to think about:
Breastfeeding is probably the most cost-effective option, but you may want certain accessories such as adapted clothing, a breast milk pump or breastfeeding compresses. Commercial preparations come in different forms, such as ready-to-drink mixtures, or liquid or powder solutions to mix with water. Prices vary depending on the volume per unit and the store where you shop. Introducing baby to solid food is the next step, and how much you spend on it will depend mainly on your cooking habits. The more you make yourself, the less expensive it will be. Of course, you should buy a highchair or other safe type of seat in the first few months for when your child is ready.
- Diapers, baby hygiene and care products
Disposable diapers are often cheaper per unit when purchased in large quantities. The cost also depends on the brand and the retailer. Washable diapers are more expensive up front, but they can be more economical after a period of time, especially if your municipality offers subsidies. You will also have to buy hygiene products such as baby shampoos and soaps, towels, bath accessories, creams and more.
- Baby’s bedroom
You will need a baby-safe cot and changing table. You will probably also want to decorate your baby’s room to make it warm and inviting.
There are two important factors to consider when it comes to baby clothing: season and growth. Babies grow fast and change their wardrobe completely about three times in the first year. You should have the right size of clothing for the right temperature, in the right amount.
- Transportation and activities
You will need specific equipment for each way you travel with your baby. For example, you’ll need a stroller or baby carrier when walking. In the car, you will need an infant car seat and then move up to a bigger car seat as your child grows.
If you run, cycle, hike or go cross-country skiing, you will also need to equip yourself to enjoy these moments with your child safely.
- Childcare services
The costs vary depending on the province and the type of service you have access to. Childcare tax credits or allowances could reduce your bill.
How do I review my savings plan based on my new baby budget?
The arrival of a baby is a big change in your life, and it may take some time to adjust your family finances. Even if your expenses exceed your income because of all the new purchases, keep a long-term view of your budget and consider how you could cut certain expenses.
If you manage to generate a surplus, the best thing to do is to develop or keep the habit of setting that money aside not only for emergencies, but also for retirement. Remember, when it comes to saving, the earlier you start, the more it pays.
RESPs, a new opportunity
When you have a child, you can contribute to a Registered Education Savings Plan (RESP). Few investment opportunities offer a potential return of more than 20%. But RESPs do just that because the federal government adds to your RESP up to a certain percentage of your own contribution, and some provincial governments do so as well.
You should consider—and even put priority on—opening a RESP as soon as your first baby arrives. If you have a second child, your contribution limits will increase.
Adjust your RRSP strategy to take advantage of its benefits at the right time
If you used to contribute to your RRSP before your baby was born, your strategy may need to be reviewed, as in some cases it may be better to contribute to your RESP instead.
By taking a break from contributing to your RRSP when your income is lower (during your parental leave), you'll be able to carry forward your unused contribution room and use it later when your income returns to its usual level. You could then pay less tax in the year you contribute, as well as being eligible for more tax credits and allowances.
Also, since your income may drop during your parental leave, a TFSA contribution could be more advantageous because you can dip into your savings tax free.
Take another look at your insurance coverage
If you're covered by group insurance, there's a good chance that a significant event such as a birth will give you the right to change your coverage outside of the normal renewal period.
It's entirely understandable that you would want to change your coverage to reflect your new family situation. Payroll charges may be higher, however.
The arrival of a child should prompt you to think about all kinds of contingencies, even those that we prefer not to think about, such as death, serious illness and accidents. In the event of a disability that prevents you from working, would your family budget still be sustainable without your income? Could your partner financially support the family without you? Fortunately, insurance solutions exist to protect your family. Get advice from an insurance expert.
Take time to review your personal situation
In short, the arrival of a child is an event that will change your life in many ways. You’ll have a lot on your plate in the months leading up to the birth, but remember to take a look at your financial situation. You may need to review not only your budget, but also your savings plans and insurance coverage to ensure your peace of mind. Our experts are here to help. Have questions? We’ve got answers.