How to manage your money once you have a baby

Worried about how to manage your day-to-day money with a baby on the way?  Trying to figure out how to figure it out now that baby is here?

This episode of Sara makes Sense covers what facts to pay attention to, how to sort out how much money you've already spent and how much you have left to make choices on.

Have a question that you'd like Sara to answer in a future episode?  Email ask@saramakessense.ca

Additional resources:

Maternity/Paternity leave benefits  in Canada: https://www.canada.ca/en/financial-consumer-agency/services/starting-family/maternity-parental-leave-benefits.html 

Maternity leave Europe: https://www.europarl.europa.eu/RegData/etudes/ATAG/2019/635586/EPRS_ATA(2019)635586_EN.pdf 

Child care costs by province, Canada:https://arrivein.com/daily-life-in-canada/child-care-in-canada-types-cost-and-tips-for-newcomers/

Child care costs United States: https://www.verywellfamily.com/affording-child-care-4157342#:~:text=The%20average%20cost%20of%20center-based%20daycare%20in%20the,%241%2C740%20monthly%29%2C%20according%20to%20ChildCare%20Aware%20of%20America.

Child care costs across Europe:  https://www.irishexaminer.com/news/spotlight/arid-40727262.html  

What Sara loves about this article about child care costs- it works with the percentage of family income that is spent on child care, not just the dollars to the care provider.  As we have discussions about how to change child care, increase women's participation in the work force and balance family and work, we need to look at different angles.  Even though it was written in 2018, there's useful information for planning your life: https://www.cnn.com/2018/04/25/health/child-care-parenting-explainer-intl/index.html 

Transcript

Sara (00:05):

Welcome to Season Two of Sara Makes Sense. In this season, most of my episodes are going to focus on how, how do you manage your income and expenses? How do you use things like RESPs and R RSPs and TFSAs and how do changes in the economy in policy, in the world, in your career? How do they affect you? That's what we're focusing on this season. If you've got anything that you'd like me to cover, you can always email me at ask@saramakessense.ca  

Sara (00:53):

What am I talking about today? Today I'm talking about what having a baby does to your finances. What do I hope you come away with? I hope you come away with a better idea of what you need to focus on to stabilize your finances. In this time, a list of things that you can do to take the confusion and stress out of your day to day bank, account balance. As you're trying to manage all of these new costs, these new demands on your time, in this episode of Sara makes Sense; I'm talking about the income and expense changes of being a parent. We'll cover what happens to your income and expenses, the choices you have to be financially stable and how to make sure your sleep deprived self doesn't torpedo your bank account. I'm Sara McCullough. And this is Sara makes Sense. 

Sara (01:48):

If you're listening to this episode pre-baby and you're planning on income from government programs to replace some income from your working time during your maternity or paternity leave, here's a quick global breakdown. For my Canadian listeners: Canada does have paid maternity and paternity leave. I'm not going to get into the nitty gritty, tiny details, but through employment insurance, if you qualify for employment insurance, one, or both, parents can take a paid leave after the birth or adoption of a child. So remember, you first need to qualify for EI benefits to receive anything in the parental benefits category. You also need to be aware that the EI benefit is not the full amount of what you were earning when you were working. It's 55% of what you were earning. And further to that, there's a maximum that EI is going to pay you: $501 a week. So if you are making $60,000 while you were working, you're not going to get 55%, because that would be $634 a week, which is above the maximum. 

Sara (02:57):

Okay. So again, if you qualify, I want you to slow down and review what you were making when you were working, what EI covers, what will land in your bank account and for how long. But you thought employers topped up EI? Well, that's kind of true. What I want you to know is whether it's true for you: only one in five women who receive maternity EI benefits are also receiving a top up from their employer. So if you're one of those five, I don't want you to miss out on that benefit. But if you're one of the other four, I don't want you to be surprised when you go on leave. For my U.S. listeners: the United States is the only OECD country without paid parental leave. So federally, your job should be protected for 12 weeks. If you take a leave after the birth of a baby,  your employer may offer some type of maternity leave payment, paternity leave payment, but for the most part, you're going to be on your own balancing the lost income against the need to be home with your baby. 

Sara (04:05):

For my European listeners, all European countries have a leave policy that includes paid leave.  The amount of income and the length of time varies. So make sure that you've done your research and you can figure out what benefits do you qualify for and how do you apply for them? So wherever you and your family are living, it's important to understand how much money will be coming into your house after your baby was born, both in the period in which you've taken a leave from your job and the period after you go back to work, because there's going to be some other changes that happen there. So if you're listening and you're a stay at home parent, and you don't plan for that to change, and you're stressing about how to manage your bank account, keep listening because there's information that you can use as well, coming up about how to track your numbers, to get to the questions that you need to ask yourself and the answers that you need to have to decrease the confusion and that day to day stress. 

Sara (05:04):

So here's how I work through this with my clients. How do I do their plan? The first thing I look at for my clients is: I need to have a really good idea of how much is coming into the house. And what I mean by that: how much lands in your bank account and how often. So when I send my clients a list of documents that I need, I do ask for your tax returns, but I also ask for a recent pay slip, because again, part of your planning is focused around your salary and that gross income, but for this specific area, when we're talking about such a big change in income and expenses, I really need to know, and you really need to know so that we can talk through options. What lands in your bank account. So not just after tax. Your tax return will tell me how much income tax you've paid, it tells me maybe a few of your deductions, but that pay slip is really, really important because that's going to get both of us to two numbers. How often do you get paid? How much lands in your bank account? How much do you have control over? Because that piece is key. And the timing matters because for most of us, the reality is we work in monthly blocks. Very few of us actually get paid monthly, but a lot of our expenses happen monthly. And so I find when I'm advising clients, that's just the easier number to work with. And if you're paid biweekly or you have a biweekly payment, and a lot of us have set up a mortgage payment, biweekly, or a car payment, biweekly, those are the two that I find really happen a lot biweekly. And there's a lot of us that get paid biweekly. 

Sara (07:05):

There's a little bit of math that we need to do to figure out: what is your monthly number. If you are paid biweekly, you actually get paid 26 times a year because that's every other week in a 52 week year. So I'm going to look at that net number on your pay slip. I'm going to multiply it by 26 and then I'm going to divide by 12. And that gives me your monthly number. I find for most clients that is the best place to start when we're breaking down income and expenses and getting to that whole affordability factor or getting to: I don't understand what's going on in my bank account. And now we've got this baby coming, or we've got this baby already here, or, oh my goodness, I'm going back to work and we've got childcare costs, and I just don't know how to make this work. 

Sara (08:00):

All right. So first we've got to get to how much is coming in and then how much can you make any choice over at all? Then I'm going to look at how much is going back out. And when I send the document list to my clients, it includes a spreadsheet, but it only includes some of your regular expenses. What I'm looking for to start is what are your fixed expenses? Those are the expenses that occur regularly in a roughly predictable amount. Okay. And again, I want you to let go of the traditional idea of budgeting. If you were thinking, I was going to talk about budgeting and spreadsheets and breaking down all your categories in this podcast. In 19 years of advising, I've worked with seven clients who can manage their money in that traditional idea of budgeting. And for those seven, it works really, really well. 

Sara (09:03):

And that's great, but for most of us, it just doesn't work and we'll cover the why of that in a different podcast. But for today, what I want you to know is: if you been struggling with this and it's not been working, you are in the vast majority. So when I start talking to my clients about their expenses and what's going back out, I actually am looking for what have you already scheduled to go out? Or what do you know is already going out and what decisions have you already made? And let me just explain that a little bit more. So rent or mortgage, most of us are clear that that's a fixed cost, right? That's a decision you've already made. If you've bought the house and you've got a mortgage or you've rented a place, you know that you've already spent that money. So when it comes in, you can't make a choice on it. 

Sara (09:58):

Again, you've already made the choice. If you've got a car payment again, already going out, those are the ones that are clear. Utility bills. Those are pretty predictable. Sometimes there's some seasonal variation, but for the most part, we can get a pretty good number on that. That's going to hold up most months. If you've got a Netflix subscription or an Apple music subscription, again, on that $17, you can't make another choice. You can't spend it on groceries, or if you do your bank, account's not going to balance well. So that's what I mean by fixed costs. All of them.  What have you already committed to spending every month? And sometimes that expense spreadsheet can look a little bit confusing to new clients because there's some big categories on there that we think about a lot. And that really matter to us, that I haven't asked about. Those are your variable costs. 

Sara (11:05):

Variable doesn't mean discretionary. Variable means you've got some control over how much and how often you spend that money. So variable costs, the big ones for most of us are groceries, gas, clothes. Again, they happen regularly. They are essential, but you do have some control in the amount that you're spending. And for some of us, we've got some control in the timing of those costs. Okay. But those are the harder ones to pin down. And those are the categories where that traditional idea of budgeting fall down. Right? I think there's two main reasons that the traditional idea of budgeting doesn't work for most of us. The first one I just talked about: those variable costs, that they're hard to predict. And then the second reason I think traditional budgeting falls down is because we're always doing it in hindsight, right? We may say, “I mean to spend this much on groceries this month, or this much on clothes or this much on gas”, but then at the end of the month, you're going to look back and see what actually happened. 

Sara (12:23):

It's probably not what you thought. And there were probably some really good reasons for that, but now we're doing it in hindsight, the bank account has already had to manage whatever you did. And that's where it gets a little bit tricky and it gets hard to maintain, partly because we feel regularly like we've failed with that method. So what I want you to focus on are those fixed costs. So what money in total do you know is already going out. It already has a job to do from the moment it lands in your bank account from either your paycheck, your maternity, leave, your paternity leave wherever it's coming from, the moment it lands in the bank account, you know, how, and when it's going back out, if we focus on that and we're going to add up those fixed costs, and then we're going to look at what percentage are those fixed costs of your after tax, after deduction, income. 

Sara (13:29):

All right. And so as a starting point, I would like your fixed costs to be around 55% of your net income. And if that's where you are, probably your variable costs will fit into that remaining 45%. All right? And so again, every family is a little bit different, but as a starting point, or if you're looking to take on additional costs: if you've had a baby and you're now looking for a house again, I want you to start at that 55% of fixed costs. That's going to tell you how much house you can afford. And when your biggest change is this baby arriving and going on leave, let's look at your new income while you're on leave, whether it is your partner or spouse's income alone, if you don't have any benefits, or if it's your own income, while you're on benefits, whatever's coming in, let's look at your fixed costs and see what percentage of your income they are taking up. And that's going to tell you how much is left over again for essential things, but you can make some choices in those things. And that's where we get to, you can manage your expenses ahead of the payment, unlike that traditional budgeting idea, where you're doing it in hindsight, and you're looking at your bank account and you're not really sure, and you're tired and you haven't slept well in three days. And you just want to order in dinner.  If we've split your cost into fixed and variable and with a lot of my clients, I talk to them about using two bank accounts for this. So your paycheck goes into one account. All of your fixed costs also come out of that account. And whatever money is left over after your fixed costs are covered is going to go over to that variable account. And that's how, you know, how much you have left for that list of variable costs. 

Sara (15:37):

Again, these are essential, important costs, but can you time when you buy new clothes? Can you manage your grocery bill? If you know you have $150 in that account until your next paycheck…. do you see what I mean? So it gets a little bit easier and because it's in its own account, you don't have to subtract your rent payment or figure out when is my next car payment coming out, because you know that's been handled already in a separate account. All right. So as far as ease of management and knowing in that moment, if I do this today, have I overspent? Or if I do this today, I also wanted to do this next week- Is that still possible? You're going to know the answer to that just by looking at one number. Okay. So that's kind of the big picture. That’s how I start an income and expense plan with my clients. 

Sara (16:34):

Now, when we're talking about the arrival of a child, and we're talking about going back to work, your fixed costs are really going to change. I've got some links in my blog post and in the show notes about what our childcare costs, right? I've got global listeners, so we've got some global links there, Those are big costs and they're important. All right. So if you're going to go back to work and you are paying for care for your child, how does that work? That is a fixed cost. That's not variable, right? So we need to know how much of your income is that taking up? I said earlier, as a starting point, I would like your fixed costs to be around 55%. That's what gives you a really good chance of being able to manage both your fixed and your variable costs without accumulating debt. 

Sara (17:38):

Okay. So that's why it's just a starting point. I've worked with so many families over the years where that number actually doesn't work and that's fine, but until you know how much money is coming in after tax and after deductions, how much is going out in the fixed cost category, the variable's not going to make any sense to you. And you're going to be trying to control this through cutting back, not doing this, not doing that, canceling Netflix. It's not going to work and you're going to get frustrated and you're going to just book a vacation or order pizza or buy something online. All right. I call that revenge spending. Don't do it, or don't do it too many times. I don't want this to be a source of stress for you because this is a solvable thing. And this can be done in a way that it decreases your stress and lets you use energy on other things that are so, so important. 

Sara (18:40):

All right. So childcare costs. These are big, especially in the first five years. So how do you manage that again? You're going to need to know as you go back to work and if you have a partner and you've got these two incomes, what's coming into your bank account after tax and after deductions and then what are your fixed costs? And then what is that percentage? Okay. I have worked with some families that had a very high fixed cost percentage. One of my families that I worked with: before working with me, they were accumulating debt on an annual basis. By the time they came in to see me, they had used about $25,000  on their line of credit and they kept meaning to pay it back. And it seemed like numerically, they should have been able to pay it back. He had a very good income and it was really actually frustrating to them that they hadn't done it. 

Sara (19:45):

It felt like they couldn't do it. It felt like “we have a good income and he works really hard and how come we can't do this?” They were really frustrated. There were a couple of things that worked for them. We went through the net income in and then their fixed costs out and it turned out their fixed costs were 80  percent of their net income. So as the money was coming into their account, 80% of it already had a job. They could make choices on 20%. And so interestingly, as soon as I told them that all of a sudden it made sense to them about why it felt like money was leaving the account so quickly. It was because of the choices that they had made in their life. Now, their kids were older at the time that they came to me, they had two preteens, there was a lot of activities. 

Sara (20:45):

They did own a cottage because that was kind of their family getaway. So actually a lot of their lifestyle choices, they had structured them so that they were fixed costs. As soon as they were aware of that, it became a lot easier for them to manage the rest of their variable costs. It made sense. And when I asked them six months later, “how's it working? Does it feel like you're now making enough money?” They said, “yes, it's been so good”. And they weren't actually using the line of credit anymore. They weren't having to go in there before he got paid again. And prior to knowing that fixed/ variable split, they had been using the line of credit. Now the other big thing that we did for them was reschedule some of their payments. That can also be key. Mis-timing your payments alone can mean that you accumulate debt and it actually becomes very difficult to get rid of. 

Sara (21:45):

Okay. If you have ever thought, “I'm just going to put this on my line of credit or put this on my credit card. And when I get paid again, or when I get my tax return, I'll pay off that debt”, and then it doesn't happen. If that's you. I want you to look at the timing of your payments that are going out; your fixed payments and the timing of your income coming in, because sometimes there's just a mismatch. And so having those payments line up with when you get paid really can help. Okay? And in this case, the client got paid once a month, their house mortgage can came out biweekly. Their cottage mortgage also came out biweekly, but on a different week. All right. So they had mortgage payments flying out all the time, but money coming in one time. They were able to go to the bank and reschedule all those payments. 

Sara (22:50):

All right. Now in the first months of a reschedule, it's a little bit choppy and it's going to be, you know, you may be a little bit short and you're going to actually have to make that up. You're going to owe yourself some money, but if you can smooth it out, timing does matter. And mis-timing can mean that you accumulate debt when you actually may not have to, but it's happening because you're busy, because you want to spend energy in other areas. And because you're stressed. Stress spending is a real thing. Revenge spending is a real thing. And by revenge spending, I mean that “I deserve it feeling”, so timing is important. And that ratio of fixed costs to net income is really important because if it's really high, you are likely to take on debt at some point, and you're going to have trouble paying it off, especially if you own a home. 

Sara (23:48):

One of the fixed costs that we underestimate most often is home maintenance. If you own a home, by definition, repairing the roof is not a surprise. We often talk about of these costs, like they’re a surprise. I had a $2,000 expense in August that I do often talk about as a surprise. I was not expecting it. My very large tree in my backyard got hit by lightning. It was $2,000 to finish taking down the part that the  lightning didn’t take down and get the backyard cleaned up. So, was it a surprise in that I didn't know lightning was going to hit my tree that day? that part's a surprise. Is $2,000 in maintenance for a home that I own a surprise? It should not be. So this is where, when we talk about your fixed costs, I want you to really take a look at what decisions have you already made. 

Sara (24:53):

If you own a home, you have agreed to the home maintenance costs. If you own a car, you again have agreed to the car maintenance costs. So I want to put in something for those lines, those are a bit more of an estimate. They've got to be in there because you've got to know what reasonably speaking those costs are. My fixed costs against my income. So how much do I have left to deal with the other essentials? The other essentials that jump around in price: groceries, gas, clothes.  You can’t directly control the price of groceries. We've got some room there, right? We can choose where we shop, what we buy, how often we go out gas prices. Well, the gas prices,  sometimes we can adjust our driving habits. So again, I want you looking at what do you have choice over. 

Sara (25:55):

How do we save for a vacation? What's a reasonable amount that you can save for a vacation if that's important to you. And this is where we've got to start looking at what are your priorities? All right. So sometimes as your childcare costs are very high in those early years, you may have to wait on some things or reduce some things. But I think it's important that you know: what's going to change your financial stability versus what's not going to change your financial stability, but might sound good. I think a lot of us are familiar with the idea  “if you just cut out buying fancy coffees every day”, and then you think, Hey, wait a minute. I'm at home with a baby. Maybe I don't need to buy a fancy coffee cuz I'm not going to work every day. Sure. 

Sara (26:48):

The fancy coffee is actually unlikely to help you feel in control of your bank account. If you also don't know those other numbers we’ve discussed. All right. So trying to pick away at some of your fixed costs are really unlikely to make big changes. It's understanding what have you already spent as a proportion of what you're earning. And that's the biggest thing that you can do to really get control over this and understand what's changed and what’s now possible. And then what do I do about that? So sometimes in the early years of raising a family, sometimes your fixed costs are really high and there's nothing that is going to change that. But sometimes there are things that will change that. So I've mentioned childcare costs as you're going back to work, your childcare costs are, for a lot of us, a big fixed cost. If you are in living in a place where childcare is a big cost, then I also want you to take a look at, are there any tax breaks? 

Sara (28:00):

A lot of, of countries/ states/ province also offer either tax deductions or tax credits for childcare costs. So this is an item that yes, you are going to pay it every month, every week, however you've arranged to pay your provider. You are going to pay it and it's going to change your bank account situation. Okay? So by that, back at the beginning, when I mentioned EI benefits, and I said, if you're earning $60,000, here's what you need to know. So let's use that number. Let's say you're earning $60,000. You've now gone back to work and you have childcare costs of $10,000 a year. I'm just going to use round numbers because you can't see me writing on a blackboard anywhere. And I assume if you're listening, you're probably not writing as I'm talking. So you earn $60,000 before any deductions and your childcare costs are $10,000a year in Canada. 

Sara (29:09):

Federally, so countrywide, you get to take that $10,000 and you're going to deduct it off your taxable income. So instead of being taxed on $60,000, you're taxed on 60 minus of $10,000 childcare costs, you're taxed on a total of $50,000 tax deduction. Okay? It reduces the amount of taxable income that you have. In the U.S., childcare costs are a tax credit.  Those are a little bit different. And depending on your income bracket, they can be really different. So in the U.S., you're still earning $60,000. You still have that same $10,000 cost in the U.S.. You're going to be taxed on $60,000 and on the tax form, as you're working through, you're going to figure out how much tax you owe, and after you figure out how much you owe, then you're going to tell either the feds or the state, wherever you're at,  “I also had this cost” and you get to deduct it off the amount of tax that would've otherwise been payable. 

Sara (30:20):

Okay, that's a tax credit. So tax credits just happen later in the tax process. Tax deduction reduces your amount of taxable income; tax credit- reduces how much you would have paid. Okay? So again, you're going to pay it either week or monthly. You've gotta figure out how to manage it coming out of your account, but I don't want you to lose sight of you're also likely to get some of it back in the form of tax relief. Okay. And there's a couple of ways to deal with that, depending on the tax regime that you live in. You can ask your employer to reduce how much tax is deducted from your regular pay slip. Okay? So that gives you more to work with immediately. If that's not possible, just be aware, you may be accumulating debt. If you do that, you need to be very disciplined because what you're going to do is only move the amount that's related to the childcare costs. 

Sara (31:31):

And when you get that tax return, you're going to put it right against that debt that you accumulated. Okay? So sometimes there is no other way to manage your life as it is in this moment. Sometimes you may be taking on debt. Another financial planner, an author that I know uses the phrase ‘controlled burn’. She says, “listen, there may be a time that this is the situation. And there's a reason for it. There's kind of a start date, an end date. There's a situation that we know this is happening. You've got to be disciplined, though. If you are disciplined, you can get through it”. Controlled burn. 

Sara (32:22):

So that, big picture, is how I work with families who come to me and need planning because their big change is having a baby or their big change is going back to work after having a baby. And what they really want to know is: how do I manage my finances so that I really can spend more time and energy on the things and the people that are important to me, but I can also so know that I'm being financially responsible and that as a family, whatever your family looks like, we are going to be financially stable. And so in conclusion, remember from time to time, we need someone who can cut through the noise and babies are noisy. So you need someone who gets to know you, not only as a person, but as a family and can really show you and make sense of your financial plan and can do so honestly, using the priorities that you have and giving you the realistic options for this stage of your life. And I'm not just talking about the numbers, I'm talking about explaining what the numbers mean for you. This relationship, this plan belongs to you, not your planner. I'm Sara McCullough. Thank you for listening to Sara. Makes sense. 

Disclaimer:

The information in this podcast is intended for general information and illustrative purposes only. For advice relevant to your specific situation, meet with a qualified financial planner, lawyer, or accountant before making any changes to your situation. Sara's designations and licensing include: Certified Financial Planner, Registered Financial Planner, Certified Divorce Financial Analyst, Chartered Divorce Financial Specialist, and holding an insurance license.