Month: June 2014

Top 4 tips to be prepared for the worst

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I was chatting to my friend recently about a friend of hers who recently broke up with her long-term boyfriend.

“You know what she says one of the hardest things have been for her?” my friend asked me. “How much harder it is now for her financially. Now its not just that she is heartbroken, but she is heartbroken AND her living expenses pretty much doubled overnight.”

I’m not surprised at all. Whether or not your partner/spouse is the primary income earner or not, you are likely very dependent on their income to maintain your current lifestyle. And while I’m not suggesting that one should live so frugally that they could do without an income without breaking a sweat, I think that there are somethings that you should prepare for, especially when you are also a parent, if your spouse or partner died or became disabled.

Now, I’m not going to discuss how to prepare for a relationship breakdown or divorce in here – even though it was the inspiration for this post. I think there are ways to always be a bit prepared to be on your own, however not all marriages and relationships breakdown but EVERYONE dies at some point, so its good to be prepared for the sake of your family.

1. Get life insurance

If you are married or have children with someone, you AND your spouse NEED life and disability insurance. And not a ridiculous amount like I always seem to see on TV that would just barely cover the cost of a funeral, but a decent amount – at least enough to cover your mortgage and 10 years worth of other housing costs. Also, its better to get life insurance earlier rather than later – you will pay much lower premiums.

As a side note, I’d also caution against buying mortgage life insurance that your mortgage broker or banker will try to sell you when you get approved for your mortgage. All that will be covered is the mortgage BALANCE, not the amount you originally borrowed. The premiums are usually higher than regular term life insurance but they stay the same even as your mortgage balance decreases. So if you are paying $30 per month when you get your $300,000 mortgage, its still going to be $30 per month when your mortgage balance is $250,000. Also, because often the bank employees selling the mortgage insurance aren’t licensed, they may not recommend the correct type of insurance and the insurance company has the right to decide that you are NOT eligible, EVEN after you’ve been paying your insurance for years.

Please contact a licensed life insurance broker to discuss the right options for you.

2. Make/update your will

I’ll admit it – we only finally got around to making a will after my second son was born, over six years after getting married. We just kept putting it off and my husband just did NOT want to talk about it and told me to handle it and he would just sign it. But getting the will done was a huge weight off my shoulders.

I get it – there is something incredibly morbid about drafting a will – but we need to face the fact that we are ALL going to die at some point. And as parents, we need to make that our children will be taken care of as best as possible if the worst were to happen and that it is OUR version of what is best,and not what someone else’s version of best, is what is done.

Picking someone to be your child(ren)’s guardian is important. Don’t put that burden on your families to have to decide (or worse, fight over). Also, making a will forces you to think about how you want your children raised over the long term and how YOU would spend your money on them. For example, you may want money left for your children to be used for private school tuition or saved for university but unless you have a will that expressly states so, your children’s guardian may decide that the best use of your money is to use it for travelling around the world. It makes you think about how you want your children to inherit (everything at 18? Some at 25?) and picking trustees and executors (if you die before your children are adults, wouldn’t you want to make sure there is someone you trust and who is smart to manage their money until they are ready?).

Its also just good to make sure you and your spouse are on the same page about what you want for your children – because realistically, its more likely that you and your spouse will die at different times (as opposed to a tragic accident killing you both at the same time). For example, I’m Catholic and it is important to me that my children are raised Catholic and attend Catholic school. My husband isn’t Catholic but he knows this is important to me and promised to continue to raise our boys Catholic if something were to happen to me.

An added benefit to making a will is it gets you to list all those assets and organize your finances in one place.

If you already have a will, it’s good to update it every few years, especially after any new children are born, you obtain a valuable asset or something happens to your appointed guardians/trustees.

3. Have an income back up plan

One of the greatest things about our house is that we have a basement apartment in it – and its a huge comfort to know that if we really need to, we can always rent it out. I think every family could do with a back up income plan – whether its an asset that can be rented (like a basement apartment or cottage) or a skill that can be put to use. This is especially important for families that have a stay-at-home parent – that parent should try to either continue with some sort of education in the field they were in before choosing to stay at home or take courses in something that interests them so that if they do suddenly need to re-enter the workforce, they will be somewhat prepared. This is good too if the stay-at-home parent simply decides they want to return to work or if the working parent can’t for whatever reason (due to job loss, illness etc).

4. Have an emergency fund – and make sure you BOTH have access to it

You should already be contributing to an emergency fund through your budget, but I wanted to reinforce the importance of one in this post too. While in theory you may be covered for all costs of losing a loved one through insurance and wills etc, sometimes the process of getting your hands on those funds may take a while – especially as you or whoever will have to navigate through it all while dealing with grief.

That is why you AND your spouse (or someone you trust if you are a single parent) NEED to have easy access to your emergency fund – money there to help you through those tough days and weeks. Make sure the account is joint and you both know how to access it.

Hopefully these plans never have to be put to the  test or at least, not before your children are grown and able to care for themselves. But I truly believe that the test of whether or not someone is a good parent isn’t excelling at the easy things – like kissing away boo-boos or serving up made from scratch organic meals or buying thoughtful presents. Its also doing the hard and unpleasant things – like taking your kids to get their shots, disciplining bad behavior and drafting plans of what to do if you or your spouse die.

Budgeting with Childcare

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child care

I recently had a reader ask me whether the Housing & Fixed essential expenses should still be under my recommended 35-40% threshold after childcare expenses are added. This is a great question, and I’ll admit something I forgot to factor in realistically when I was drafting my budget template. I know that in some places, childcare is very affordable, but in others, its crazy expensive. I learned this firsthand when I realized we were paying only $50 less a month for childcare – for ONE child – than our mortgage.

So I’ve decided to re-jig the budget for those who have those substantial childcare costs to help them budget better and make sure that it doesn’t skew their budgets too much. I’ve moved childcare from the Housing & Fixed expense category to the Life category. However, doing so would pretty much kill most people’s life category and would be unrealistic. So, while I wouldn’t recommend doing this for ANY OTHER circumstance, I would lower the Future category from the recommend 20% to 10% and transfer that 10% to Life for the period your child(ren) require child care.

The reason is that unlike an expense like a car, where you determine you have $400 per month to spend and sticking to that would only require picking a cheaper model car, childcare isn’t as flexible. I mean, sure, there are always cheaper options in theory, but in practice they may not be. The problem with cheaper childcare is that a) it may not be available (seriously, some places have waitlists that are over 500 kids long) b) may be available but only by an unlicensed provider or c) may be at a very inconvenient location. And at the end of the day, you need to pick the childcare option that you, as a parent, feel most comfortable with. This is one category where I don’t think you should look for the cheapest option – you pick the option that gives you most peace of mind.

The reason I choose to make a sacrifice in the Future category is because childcare is not a cost that will last forever or even a very long time, like say, a mortgage. Therefore I think its acceptable to skimp a bit on savings and perhaps repay debt at a slower pace while you have to pay for childcare.

Here is the new budget template –> Kasia’s Basic Family Budget – Child Care update

However, I also have a few tips that might help you manage your budget during your insane childcare cost days:

1. Save — don’t blow — your tax refund

At tax time, allocate any refund you have to boost your savings – either in an RRSP or TFSA, whatever, to help ensure that you are still saving something. Yes, it might be nice to use that money for a vacation or upgrading your bathroom, but I would take at least 75% of it to repay down debt (like a line of credit) or boost savings to ensure you are continuously building that cushion. In Canada, the lower income earning parent can claim up to $7,000 per child (six and under) per year in childcare expenses (the first time I realized it was just $7,000 I was like “WAT” — because my annual child care bill was over $16,000 – UGH), but at least it works out to be about $1,500 in tax refund money (based on a marginal tax rate of 22%).

2. Secure a Line of Credit

Make sure you get a good Line of Credit (home equity ones usually have the lowest interest) secured for emergencies. Normally I would recommend building up a solid emergency fund for emergencies, but when your daycare costs are astronomical, this could be very hard and you need to have some sort of easy-access money prepared. Then as soon as your child no longer requires daycare or you manage to find a much cheaper option, then you boost your savings again.

3. Choose a longer amortization period

If you are buying a house, or close to refinancing, consider choosing a longer amortization period, if you are eligible. This will decrease your monthly mortgage payments and give you more budget for childcare. Ok, yes, you will end up paying more interest for a short while, but hear me out: most mortgage terms are for 5 years after which you have to refinance. So you just pay less on your mortgage for those few years and then when time comes to refinance again and you no longer have to pay for child care, you just lower your amortization period to make up for it.

4. Boost your income & lower your expenses

There are several ways to boost your income when you have kids and I will be doing a whole post about that soon. But I wanted to mention two things that everyone should do immediately, especially if they have those high childcare costs:

– The first and easiest is to have your eligible dependents (i.e. you kids) added to your TD1 form (here is the Ontario one), which will deduct the amount of income taxes are deducted from your pay cheque, thus increasing your net take-home pay.

– Make sure you are getting the Universal Child Care Benefit! Its $100 per child per month until they are 6 years old – and EVERY Canadian family qualifies. It is taxable however, so remember to include it in your tax return.

– If you have a credit card balance and are paying more than your interest on a Line of Credit, transfer the balances to save on interest costs. Then cut up the cards (well, keep one for emergencies) because carrying a balance on a credit card is probably the stupidest financial mistake you can make.

– If you have more than one child, consider getting a nanny. A nanny will usually cost you just over what one child in daycare costs, but will be significantly less than having two kids in care, especially if you have a space for them to live in.

At the end of the day…

However, as long as you aren’t going into debt to pay for childcare, you gotta do what you gotta do. Even if it means that your budget it out of whack for a while, as long as you aren’t going into debt to pay for it, you are fine. Just stay conscious of your budget overall and continually look to see where you can cut expenses in the short run.