We all know parenthood is expensive, but be prepared to be floored – the cost of raising a child from birth to age 18 can cost $233,000, according TD Economics. That’s not chump change by any means.
Are you prepared for the strain a toddler can put on your finances? Fifty seven per cent of parents are not adequately prepared for the added expenses of raising a child, the study found. With so parents caught off guard, saving for other priorities – like retirement – suddenly seem out of reach. But don’t get the baby blues just yet – starting a family doesn’t necessarily mean putting a hold on saving for retirement.
Family Expenses vs. Retirement Savings
When it comes to starting a family and saving for retirement, it doesn’t have to be one or the other. With the right financial plan you can achieve both. “Retirement will always be a focus for most Canadians, but starting a family will cost a lot,” warns Amanda Ying Li, Financial Advisor at Edward Jones. “It’s important to revisit financial goals and decide what is the right thing to do is. Maybe you’ll reduce retirement savings because your income will be less and expenses will increase. For some families nothing will change and you’ll be able to set up an RESP to save for your child’s education. It’s important to meet with your financial advisor to decide what the right thing to do is.”
Starting a Family Later in Life
In today’s workforce, college and university have become the new high school. Obtaining a post-secondary degree is often just a foot in the door for a decent paying career. It’s the new norm for couples to delay starting a family until their mid-30’s and early 40’s in order to finish their education and kickstart their earning power.
“In terms of finances, what I see is most people are having children later in life when they are more established,” remarks Li. “Most couples that start families later in life are more prepared. The financial side may be less worrisome, but on the emotional side they’ll need more energy. Some families that lack savings will need to reduce contributing to their RRSP. The key is to review your finances before you have a baby, so you can prepare for the effects a baby will have on your budget.”
Preparing Your Finances for a Child
If you plan to take parental leave, it can be challenging to keep up with your retirement savings, especially with the added expenses of raising your child. “Your income will be less if one partner takes parental leave,” warns Li. “The government will lend a helping hand with the Canada child tax benefit, but often it’s not enough. You need to decide whether you want to return to work after one year leave. If you have this conversation beforehand, maybe you can save some emergency cash and reduce spending in your budget. Starbucks lattes can be expensive and add up over time. A child can cause a lot stress emotionally if you aren’t prepared with a financial plan.”
Advice for Managing Your Budget and Retirement Savings
Parenthood is often a lesson in frugality. “It’s really important to track your expenses and decide what your needs and want,” advises Li. “Sometimes what you want is not what you need. It’s also important to make savings automatic. It will be difficult to come up with money at year end to contribute towards your RRSP. Even if you can save $25 a month it can make a big difference over time. Be sure to set up an RESP for your child. You can contribute up to $2,500 and qualify for the Canada Learning Bond. If your money is tight, consider contributing to your RESP first. After you go back to work, you can catch up on contributing to your RRSP.”