Jacky wrote me an email that began like this: “We really enjoy your Thursday Soup Stevie, but how come you never write anything about parenthood and real estate. For example, how does having little ones change up the financial picture from a preparation standpoint.”
My first thought was, wow–that’s a pretty tall order. I mean, it’s a great subject to tackle but where would I begin, there are so many angles to take.
Thinking it through, I realized one question came up regularly, especially among my buyer clients seeking a mortgage: how do we financially prepare for maternity leave?
Hence, today’s Thursday Soup was simmered and ready to be served!
Preparation for a new baby often starts from the moment we see that first sonogram. Beyond the diapers, bottles and furniture to be purchased, there is one thing new parents should not overlook: the cost of maternity leave.
If you’re planning to take a year off work and haven’t saved enough, it can be financially stressful.
To better prepare for this reduced income period, here’s an overview:
New moms can take up to 52 weeks off from their jobs but it doesn’t come with a full pay cheque.
If you have worked at least 600 hours and your weekly earnings while on leave will be reduced by more than 40 per cent, you can claim Employment Insurance (EI) which provides a limited source of income during your leave.
EI benefits are calculated as 55 per cent of your normal earnings up to a maximum amount.
As of January 1, 2015, the maximum yearly insurable earnings amount is $49,500 which amounts to $524 per week. Some organizations offer a top-up to EI which can help, but it’s usually limited to a certain number of weeks.
With this in mind, here are a few tips to help you anticipate the costs of raising a child during the first year.
1. Assess who should stay home: If the mother is the breadwinner, it might make financial sense to have the father stay home to minimize the impact on the family’s finances.
2. List all expenses: If you don’t already have a household budget, track where your money goes each month and calculate costs for everything your new baby will need, such as diapers, formula, and more.
3. Calculate your maternity/paternity leave income: Determine if you are eligible for EI, how much you will receive, if your company offers a top-up, plus any other sources of income.
Some employers will offer a “top-up” benefit, which pays a portion of your regular salary in addition to your Employment Insurance for a specific period of time. The top-up amount and how long it is offered varies from company to company.
Ask your employer the following questions:
How much leave am I eligible for? Can you use vacation days and sick days to maintain your income for a few extra weeks before returning to work?
Check your employee benefits and find out what your employer’s policies are about paid and unpaid leaves and vacation time.
What are my health and dental benefits while on leave? Find out if your employer will continue to cover your extended health and dental benefits while you are on leave. If not, and you want to keep them in effect, remember to include the premiums in your budget and make the required arrangements.
Can I still make pension contributions? Lost pension contributions can really add up. If you contribute to your employer’s pension plan, find out:
- how much money will you lose in pension contributions
- how can you continue to make pension contributions while on leave
- how can you make up for lost pension contributions once you return to work.
How much income tax will be withheld?
If you receive a top-up from your employer, make sure there’s enough tax being withheld; otherwise you may end up with an unexpected tax bill when you file your income tax return at the end of the year.
4. Start Saving: If your anticipated expenses are significantly higher than your expected income, you should start saving before the baby arrives. The difference between your expenses and anticipated income is the absolute minimum you should be saving each month to fill the void during your time off.
Don’t let the lack of preparation add more stress to an already chaotic life as a new parent. Having a financial plan in place before the new bundle of joy arrives will allow you to focus all attention on enjoying the precious moments without worry of making ends meet.