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I’ve been thinking about the benefits and financial challenges of maternity/parental leave a lot lately, because we have a four month old granddaughter and my daughter is off work for a year to take care of her.
While four months off is all that was available when our two children were born, job protection and EI benefits that can be split between parents are now available for up to 50 weeks after a two-week waiting period in most parts of the country. Quebec has its own Quebec Parental Insurance Plan with different benefit levels and duration.
However, in 2012, the EI benefit maxes out at $485 a week. So unless new parents are lucky enough to work for an employer who tops up EI maternity/parental benefits, taking care of baby can mean a significant drop in family income. New parents who are self-employed face an even bigger financial challenge if they have elected not to opt into the EI system.
How do new parents plan to cope financially?
Recent research from TD Canada Trust finds that 72 per cent will use savings during a year-long parental leave, while 28 per cent will rely solely on the generosity of family or friends, loans or credit cards. And almost half of Canadians (46 per cent) admit they would be comfortable taking on debt if they had a new addition to the family.
Here are some hints from TD Canada Trust on how to plan and save for a year-long parental leave:
1. Talk about it:Have frank conversations with your partner about the financial realities of parenthood and how you will work together through the emotional and fiscal implications of a one-income household.
2. Build a budget: Consider additional expenses like furniture, baby supplies, food, clothing and toys, and add them to your list of regular expenses.Keep in mind you will get gifts and relatives and friends are often happy to pass on gently-used hand-me-downs.
3. Try to keep saving: Ideally save 10 per cent of your income even after your little one arrives, and add some buffer to cover surprises, such as extra medical needs or even twins! Ensure you have room in your budget to cover the two-week waiting period and the lag of one month or more until you start receiving EI.
3. Open a Tax Free Savings Account: To save an extra $10,000 for baby’s first year, you would need to find $250 per week for nine months. A TFSA is a great saving tool, because you’re not taxed on the income you earn and you can withdraw your funds tax-free at any time.
4. Consider your RRSP: Where possible, stay on track with long-term investment plans while on parental leave. In some cases, a spousal RRSP can be a smart family saving strategy by helping the lower-income spouse save and entitling the higher-income spouse to a tax deduction. Another way to boost your retirement savings is to invest your tax refund into your RRSP.
5. Understand government benefits: Explore government benefits or tax incentives, and speak with an advisor about updating your financial plan. For example, the Universal Child Care Benefit is a government program that gives Canadian families $100 (pre-tax) each month for each child under the age of six. You may also be able to deduct child care expenses from your income when you’re filling out your tax return, so make sure to keep receipts for your child care expenses.
I would add start a Registered Educational Savings Plan in your child’s first year. A contribution of $2,500 year earns the maximum Canada Education Savings Grant of $500. Before you turn around, your babies will be ready for college and your foresight could mean they won’t be saddled with huge student loan payments when they are ready to start their own families.
Related: RESPs: 10 things to know