Making ends meet while bringing up baby

Apply for EI benefits if you're eligible, and practise living on less.

Deanne Gage 14 August, 2015 | 5:00PM

Nine months of pregnancy can be a wonderful, emotional journey. But it's also a financial journey for couples. Specific concerns include how to fund a year-long parental leave.

Employment Insurance provides both maternal and parental benefits, assuming the parent has 600 hours of employment where they paid out EI premiums during a qualifying period. The eligible parent will receive 55% of his/her weekly earnings to a maximum insured amount of $49,500 a year. Assuming the maximum amount, that means an EI benefit of $524 a week. Maternal benefits (which apply only to the mother) are paid for a maximum period of 15 weeks, while parental leave (which the mother or father can take) is paid for a maximum period of 35 weeks.

Some workplaces provide an EI top-up, but the amount isn't the same for everyone. Parents need to know what the amount is so they can budget for it, says Lee Helkie, a financial advisor at Helkie Financial in Toronto.

Some parents may make up the difference in income by using their line of credit. But that's often a recipe for debt to spiral out of control, notes Shannon Lee Simmons, a financial planner at the Toronto-based New School of Finance. "If you're short $1,000 a month, that's $12,000 of debt in a year," she says. "That's $12,000 you're going to have to address when you go back to work, on top of other expenses."

Simmons has one goal for her pregnant clients: Not to take on debt. They don't have to save anything but just break even for the year on mat leave. In some cases, she advises couples to use their parental leave to their advantage. If the expecting mom, for instance, earns considerably more income than her spouse, the two spouses should look at splitting the leave rather than have the mom take the full year, since the household income would take even more of a plunge. "In this scenario, mom going back to work has a bigger impact on the finances," she says.

Helkie recommends pregnant clients practise living on the $524 a week they'll eventually receive from EI. That will provide a reality check of what they can and cannot afford.

Mothers-to-be need to assess what they are currently spending and what they think they'll spend on parental leave. "A lot of people don't necessarily write out a budget; they have an in-their-mind budget," Helkie says. "They know their fixed expenses that come out of their bank account and then they deal with whatever they have left over."

During maternity leave, there can be a lot of emotional purchases: a cute outfit for the baby, another item for the nursery, and so forth. Many couples need to factor in the cost of formula, for example, into their budget, or understand how often they will need to buy things like diapers and wipes, Helkie adds.

Helkie has encountered some moms-to-be who want to forgo their pension payments and workplace benefits for the year to make ends meet. That could be a big mistake since benefit plans can include things like short-term disability insurance and prescription drugs. "Remember, giving birth is a major health event," she notes. "You're adding a new member to your family who may have health issues." She recommends expectant parents look at their budget and see where else they might be able to cut back on.

Couples will also need to plan for a higher tax bill. EI and any employer top-up income are taxable, and unlike a regular paycheque where enough tax is removed, that does not apply to EI and top-ups. "Tax owed the following year often catches people off guard," says Simmons. "If they have no savings and debt to pay off, then it's going to hit hard."

Practising living on less also prepares couples for a major expense once parental leave is over. If both spouses return to work, child-care expenses suddenly become a major part of the household finances, and the bill can be higher than a mortgage payment. In Canada's major urban centres, infant care at a licensed daycare centre can run families more than $1,800 a month. "A reduced income during mat leave is exercise for the daycare years," Simmons says.

As for a parent who opts to stay at home with the child, the year of parental leave hopefully gets them used to living on a reduced income.

Finally, couples should use this nesting time to set up life insurance and have estate-planning discussions. Helkie finds most new parents understand that a new addition to the family means preparing for worst-case scenarios and ensuring the child will be well provided for.

"Having a baby means parents start making very different decisions about what they do with their money and what they plan for because there's a new life," Helkie says. "But no one walks into my office and does everything at once. That's because they are still getting used to this new life and what it brings to them emotionally, physically, financially and mentally."

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.