In a previous post to help expecting mothers manage household finances – ‘15 Ways to Prepare Financially for Your Baby’ – I highlighted some practical ways to get your income and expenses to align with your growing family. Most of these suggestions where to be implemented within a short period of time (i.e. 1-2 years) and some required drastic changes in spending habits.
In this post I want to address some big picture items and long term financial planning that if implemented correctly can ensure you and your family have a bright financial future. Since no one knows what the future holds, its important to have a plan in place that will put your family in the best financial situation possible.
Post-secondary education
The cost of tuition is becoming more than what most families can bear, making it difficult to help their kids pay for some of their post-secondary education. To avoid being overwhelmed by the costs associated with obtaining a higher education, here are some tips for new parents to consider:
Start early
Don’t wait until your child is in junior high or high school to think about post-secondary costs, start within the first 3 years of their birth.
Save a little at a time, and often
If you set aside a small amount of money each month, you can save a lot over many years. For example, saving $100 each month for 18 years is $21,600 (not factoring in growth from savings and investments). This amount can help kick start the academic year for your child as they transition into post-secondary and look for work.
Take advantage of government programs
Many countries offer incentives for parents to put money away for their child’s post-secondary education. In Canada, the Registered Education Savings Plan (RESP) is a tax deferred account that parents can use to save money for their child’s post-secondary education. Within the RESP, the government offers the Basic Canadian Education Savings Grant for all Canadians. This grants are only provided if parent’s contribute money into their child’s RESP. In order to receive the maximum grant amount of $500 per year from the government, per child, you would need to contribute $2,500 towards your child’s RESP. That’s about $209/month per child. That’s a pretty large amount when raising a family and meeting other financial obligations. Here is an approach that can help alleviate some of the financial burden while still maximizing government benefits:
- Most Canadians qualify for the Canada Child Benefit amount and the amount they receive will be based on their family income and number of children. This benefit was introduced to offset some of the costs of raising kids. How these monies are used are at the discretion of the parents. Because of their small monthly amounts, it is not surprising to learn that most parents will end up using the money for discretionary spending, or not maximize the full potential of these monthly payments. Here is an example of how you can maximize your Canadian Child Benefit (CCB) so it is doing double duty. As an example, using Canadian Child Benefit Calculator we can estimate how much a fictitious couple, making $50,000 and $60,000 respectively would receive in CCB payments for 1 child living in Alberta. They would receive $209/month.
- If instead of spending this $209/month of Canadian Child Benefit (CCB) from the government, they put the money into the child’s RESP, at the end of each year they will have $2,508 in their child’s RESP.
- Because they put money in their child’s RESP, they would qualify for the government Basic Education Savings Grant amount. They would qualify for the maximum amount from the government of $500 per year.
- That means that if this couple just transferred their CCB payment from the government into their child’s RESP account, they can start saving for their child’s education, receive the maximum grant from the government without using any of their own income to save for their child’s post-secondary education.
- These savings would translate into $3,008 a year ($2,508 + $500) and $54,144 over 18 years without taking into consideration any growth in savings or investments.
- Because monies in RESP’s are withdrawn by the child when they start post-secondary education, in most instances the money withdrawn will not be taxed.
Budgeting
In my previous article, 15 Ways to Prepare Financially for Your First Baby I talked about pre and post baby budgets. Incorporating baby expenses into your budget is important as it will provide you with a better picture of what is actually left over for discretionary spending. Here is an example of monthly recurring expenses for a detailed budget as it relates to baby costs that a new family may incur when raising their new born.
Wills & Estate Planning
51% of Americans age 55-64 and 62% of Americans age 45 to 54 do not have a will in place. This number is even higher for younger families (Forbes). Many people avoid discussing wills because of many reasons, including:
- They may feel that wills and estate planning are only for those that have substantial assets to leave to their beneficiaries.
- They may be young and feel that they have time to develop a will in the future.
- They may be intimidated by the legal fees involved in writing a will.
The reasons mentioned above and many others have prevented families and individuals from writing a will. However, having a will in place is important because it provides peace of mind to your loved ones and clear directions on what you want. A will is important because it:
- Addresses who will have legal guardianship of your children if you and your spouse pass before your children are the age of majority. Informal arrangements may cause the state and social service department to appoint someone to raise your children.
- Depending on where you live, 100% of your financial assets are not automatically transferred to your wife. Without a will some states have a state-appointed administrator who would control the money allocated to your children (for a fee), until they turn the age of majority.
- A living will can provide information regarding medical treatment in circumstances where you are no longer able to express informed consent. This reduces a lot of emotional and mental stress on the surviving family.
- The cost of writing a will can range significantly depending on the complexity of your situation. It can cost anywhere from a few hundred dollars to thousands of dollars.
Term Life insurance:
Life insurance provides your beneficiaries with a payout in the event of your death. Families and individuals can choose between whole/permanent life insurance and term life insurance. However, the majority of Americans and young families opt for term life insurance because it is the more affordable option. Term life insurance is also advisable if your main objective is to replace lost income in the event of your death and not as a savings/investment strategy or for tax planning. In 20 Ways to Save on Life Insurance I provided some tips on lowering life insurance costs for all individuals. Now, I will address what to consider when getting term life insurance for individual(s) with dependent children.
At least three factors should be considered when discussing term life insurance: payout amount, length/term of insurance and riders. Disclaimer: This information is intended to be for general use. You should speak with an insurance expert for professional advice.
Payout on term life insurance
The pay out is the amount of money your beneficiaries will receive in the event of your death. If you are not sure how much of a payout to provide your beneficiaries, here are a few things to consider:
- Income disparity and dependency between couples: The larger the income gap between you and your partner, the higher the income replacement needed. Most families will insure the higher income earner as their death may pose extreme financial stress to the rest of the family. Some may also choose to ensure both couples.
- Major financial liabilities: outstanding mortgage(s) can pose a major financial burden on the surviving family. Some people may choose a pay out amount equal to or greater than their total mortgages and major debts. For example: if you have $250,000 mortgage on your residential property and $300,000 on a rental property, you may consider a term amount of $550,000 or more.
- Employability of beneficiaries: this includes your beneficiaries (surviving partner) ability to speedily re-enter the workforce or gain additional skills to increase their income.
Age and cost:
Term life insurance policies are usually offered in blocks of years like term-10, term-15, term-25, etc. They can also be offered based on the age in which the insured insurance ends i.e.) term to 55 or term to 65. When deciding how long of a term to have for your insurance, here are a few things to consider:
- Age: Both your age, the age of your spouse and the age of your dependant children at the time you become insured. The younger and healthier you are when obtaining life insurance, typically the lower your premiums. Many young individuals/couples are still building their wealth and may still have a sizable amount of debt like mortgage debt. This may cause them to insure for a longer period of time. Also, the younger and more dependant a child is to your income determine the length of your term.
- Cost: the shorter your term the lower your premiums and vice versa. Term life insurance policies must be paid on regular basis like any other expense (i.e. monthly, semi-annually or annually) so this cost should be factored into the family budget and accounted for over the length of the term. The premium amount should be reasonable enough that you can foresee paying this premium for many years to come.
Riders:
Riders are special ‘add-ons’ that can be included on a life insurance policy to provide added protection against specific things. Caution should be taken before adding riders as each rider will increase the cost of your premium payments. In most instances a rider may be avoided with careful financial planning earlier on, but in some instances, it serves a great benefit. eSurance shows the best prices on the most common insurance available.
Health insurance
In the first few months of your baby’s birth the cost of medical services can be substantial as doctors do regular check ups to ensure that your baby is growing healthy. A complete list of the exams that doctors complete in the first 1,2,4, 6, 9 months of your child’s birth can be found on this Baby Center. This cost can be $3,000 or more in just the first month without any public or private health insurance coverage.
For both public health insurance (insurance provided through the government), or private health insurance (insurance provided through a group plan with your employer or individual plan) make sure you consider the following:
- Register your baby with your public and/or private insurance provider no more than 30 from the date of their birth. This will ensure you get maximum coverage and avoid penalties in certain instances.
- For private health insurance coverage through your employer, determine whether adding an additional person onto the plan will increase your premiums and by how much. Be sure to account for this on your budget.
- Understand your coverage before and after the baby is born. Will your health plan pay for the first prenatal visit during the first trimester of pregnancy? What if you encounter severe medical complications during your pregnancy, what services are you covered for? What kind of medical products and services are covered after your child’s born? Do you want an all-inclusive plan that will cover everything from prescription safety glasses to dentist trips in the future, or are you purely looking for something for the maternity needs?
- For individual health insurance policies, don’t wait until you are pregnant to obtain a policy. The insurance company will know that you have a condition that will requires treatment or care. This may affect your premiums.