Baby Financial Planning Considerations
By: Steven Nakagawa CA, CFP
Prior to the birth of my son, a friend who has two children of his own told me that once you have a child, you will wonder what you did with your free time before children. That proved to be very true, but what most of us will also ask are the questions - what happened to all the extra money and what do we need to do now?
With a new addition to the family, there are four financial planning items that will instantly become more relevant - a budget, a will, a Registered Education Savings Plan ("RESP") and life insurance.
First, there is no getting around the fact that a child will bring added financial responsibility. Prior to the arrival there are 'start up' costs with a new baby such as furniture, accessories and perhaps much larger items, including a new vehicle or home. Afterwards, the diapers, clothes, toys and day care will all add up. Budgeting for your family is a simple and effective means to manage your day-to-day financial situation and to provide a strategy for meeting your future goals. A budget is appropriate for all income levels and is basically a way to compare your sources of income to your financial obligations in order to determine how to manage the remainder.
Second, no one likes to think that they will not be around for their children, but revising or creating a will is required because parents need to specify who the guardian of their child will be in the event of their death. Arrangements are also made in the will to provide the transfer of financial assets in a controlled manner to provide the child with a secure financial future. A power of attorney can be drawn up at the same time as your will. A power of attorney will give another the ability to make decisions over your finances and in some cases, your health, and it will operate if you become incapacitated.
Third, parents are always bombarded with literature warning of the future high cost of a child's education. While one should not be alarmed, there is definite merit to the principle that starting to save earlier is much wiser than trying to save at the last moment. In this regard, consideration should be given to starting an RESP. Basically, an RESP allows the child's education savings to grow tax free. While RESP contributions are not tax deductible like a Registered Retirement Savings Plan, when the child eventually withdraws the RESP, the income will be taxed in the hands of the child who likely will not have much income and will likely have to pay little or no tax. The maximum yearly contribution is $4,000 with a lifetime maximum contribution limit of $42,000 per child. The other bonus of an RESP is that the federal government, under the Canada Educations Savings Grant ("CESG"), will provide a direct grant of 20% of the first $2,000 of the annual contribution in a year to a maximum of $7,200 lifetime per child.
And last, revisit your life insurance needs now that you will have a dependent. With a child, one should consider what sum is required to provide their partner with the necessary replacement funds to go forward on their own with a child. A professional can assist you with determining what amount should be left over after considering your estate's tax and other liabilities such as the mortgage. In addition, since life insurance on a child is inexpensive, consider dependant life insurance as part of your company's insurance or on your own. This is also a good time to ensure that your other forms of insurance such as property, disability, critical illness are sufficient.
Whether it is determining what RESP is a good choice, determining the features of a will or considering how much insurance is enough, a Certified Financial Planner professional in concert with an insurance specialist and lawyer can help you and your family to arrive at a plan to allow you the peace of mind that your family's future is more secure.
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