Becoming a parent is a major life change, and it impacts everything from your social life to your finances.
Willful co-founders Kevin and Erin are expecting their first child, and they’ve been going down the checklist of new parent to-dos - everything from decorating the nursery to lining up the grandparents to babysit. They’ve also been working through the various to-dos when it comes to their financial and estate plan.
They’ve put together this guide to help other expecting or new parents to check off the important financial to-dos when a new baby arrives:
1. Review your budget and finances
Having a child can have a big impact on your finances! Not only do you have an extra person to account for, but any changes in your life situation may have affected your income. One of the first things to do as a new parent is to review your finances to make sure you’ve accounted for everything you need. Some questions you should consider yourself when reviewing your budget and finances include:
- What are your new everyday expenses (ie. diapers, food, other necessities)?
- What are the expected costs of childcare?
- Should I expect a change in my income?
- What is your company’s maternity and paternity leave top-up policy?
- Are there additional financial obligations to account for (ie. life insurance, RESP, emergency contributions)
2. Buy or update life insurance
One of the most important things a new parent can do to protect their family is purchase life insurance. Life insurance provides for your family when you’re gone by providing a lump sum payment to your chosen beneficiaries when you pass away - typically a spouse or children. It can help to replace your salary or income, and gives your family breathing room to adapt to their new situation without having financial stress. Becoming a parent isn’t always the trigger to get life insurance - often it’s marriage or a home purchase. Willful co-founders Kevin and Erin bought a life insurance policy after they purchased a condo together - they wanted to ensure the surviving spouse would be able to pay off the mortgage if one of them passed. But for many, having a child is the trigger that leads to purchasing life insurance - after all, you now have dependents who rely on you financially.
Life insurance basics for parents:
- Many people have a small life insurance policy through their employer benefits program - this is typically around $25,000, and typically isn’t sizeable enough to ensure your family is taken care of
- There are two types of life insurance - term insurance (pay a monthly premium over a set period, typically 25 years, for a set amount of coverage for your beneficiaries if you pass away during the term); or whole life (a permanent policy - pay a monthly premium in perpetuity for a set amount of coverage when you pass away; this type of policy also has a savings component to it)
- You can either purchase life insurance through a life insurance broker, directly through a large insurance company or bank, or online via a provider like PolicyMe
- The amount of coverage you get typically depends on your household income, ongoing expenses, and liabilities (mortgages and other debts)
- Typically you appoint an individual beneficiary on your life insurance policy, vs. appointing your estate as the beneficiary - this is for a simple reason: if you appoint an individual, the policy pays out to that person in a matter of weeks; vs. if you appoint the estate as the beneficiary (it can take 12-18 months to settle an estate, and the money would be tied up until then)
- It’s important to appoint a beneficiary and backup beneficiaries in case your chosen beneficiary passes away before you or at the same time as you
Updating life insurance when you become a parent:
Kevin and Erin will be updating their life insurance policy in two ways when they have their child: first, they’ll be removing the backup beneficiaries they currently have in place, and adding their child. This way if one of them passes away, the policy pays out to the surviving spouse; and if they both pass away together, the policies pay out to their child. Second, they’ll be increasing the amount of coverage - the increased coverage will account for covering the financial costs for the family vs. just an individual, and it will also account for future expenses like university tuition.
You can choose to update your policy in the same manner, or just update your beneficiaries. Make sure to update the beneficiaries on any employer benefits life insurance policies as well!
3. Open an RESP
In Canada we’re lucky that our government gives parents free money towards post-secondary education savings - by opening a Registered Education Savings Plan, parents can contribute funds to their child’s education fund (up to $50,000 total), and up to $2,500 per year per child will be matched by the government (up to $7,200 total) - and any interest can be earned tax-free within the account. This can add up over 18 years!
True story: Erin tried to open an RESP when she was 23, and the bank informed her that you have to have a child to open one (and here she thought she was so ahead of the game!). So you will have to wait until your child is born to do this, but you can get a head start by researching where you want to open an RRSP - common options include a bank, or an digital option like Wealthsimple. Wealthsimple also has a great detailed guide to RESPs.
4. Create or update your will
Of course this is the top of Erin and Kevin’s list - after all, they devote their life to ensuring as many Canadians as possible have a will in place to protect their family in the event that they pass away. But they’re particularly passionate about the need for parents to have a will.
A recent survey from AngusReid commissioned by Willful found that 61% of parents don’t have an up-to-date will – that’s almost two-thirds of parents!
There are many reasons parents should have a will, including appointing guardians for minor children and managing details around inheritances. Visit our Guide to Estate Planning For New Parents to learn more.
5. Make a power of attorney
Your will is 100% going to come into effect one day, but a power of attorney might come in handy in the event of an emergency. Your power of attorney appoints someone to make financial and medical decisions for you in the event that you’re incapacitated due to illness or injury.
POAs are an essential part of emergency planning - and it’s even more important for parents, since it allows someone to easily step in if something happens to you, so your children’s lives aren’t disrupted
6. Update beneficiaries on your accounts
If you’ve updated your will and added your child to your life insurance policy, you might think that you’re done - but there are other accounts that have beneficiaries on them that you’ll likely want to update, namely:
- RRSP - if you have an RRSP, you can update your beneficiary and any backup beneficiaries directly with the financial institution where it’s held
- TFSA - a TFSA allows you to appoint a successor holder in case you pass away
- Pension - this typically only allows you to transfer benefits to a spouse, but it’s worth checking with your pension provider to see if they do account for children
Keep in mind that any accounts with named beneficiaries on them will not flow through your will; rather they will pay out directly to that beneficiary.
7. Other Financial To-Dos
Here are the other tasks Kevin and Erin will be checking off their list once baby is born:
- Applying for the Canada Child Benefit - this is a non-taxable monthly payment from the Canadian government that helps with the ongoing costs of raising a child. The amount you receive depends on where you live, your income, and a variety of other factors
- Adding the child as a dependent on workplace benefits plans
- Applying for a SIN number for the child - you can’t open an RESP until the child has a SIN number, so that’s a key to-do after the baby is born.
- Applying for a birth certificate (long form as well, as it’s sometimes needed for government forms)
- Getting a passport (not really financial, but still an important to-do if you’re a traveller!)
- Continuing to build an emergency fund - having children is like having a house, in that there are always unforeseen expenses! Moka is a great tool to build your emergency fund without really noticing - it rounds up your purchases and invests the difference. It’s a great way to have a cushion for any unexpected costs that pop up
There you have it! All the key to-dos you need to take care of when you’re expanding your family. While many of these can’t be completed until your child is born, you can take steps to research your options and be prepared to sit down to take care of these tasks once the baby arrives. Erin and Kevin will be finding time in between naps (theirs and the baby’s!).