Budgeting with Childcare

 

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.

 

 

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