The arrival of a baby implies parental leave and financial impacts that differ if one is self-employed or salaried. What to expect and how to prepare for it?
Make a rehearsal
Rather than make a traditional budget, Josée Lacasse, financial planner and advisor emeritus at Investors Group Financial Services, suggests that her clients live for six months as if they were beneficiaries of the parental insurance plan. “It shows them concretely what they are embarking on financially and whether, yes or no, they will be able to do so without getting into debt. The other advantage is that it saves money and can be used to pay part of the costs at the birth of the child. A future parent who will receive 90% of his salary during parental leave does not necessarily need to do this exercise.
Taxes and fixed costs
For the self-employed, financial stress is important. “We must provide for the underpayment to pay the taxes of the previous year, says Josiane Parisien, adviser in wealth management at the Financial Professionals Private Wealth. This is a large amount considering that we do not have the same salary during parental leave. It is also necessary to plan the expenses that will be maintained, the fixed costs, the rent of the office, the mortgage, the electricity, etc. ”
Replace dividends with a salary
When prospective parents own an “incorporated” business, they must pay themselves a salary rather than a dividend the year before the leave. Otherwise, they will not be entitled to parental insurance benefits. “We must also provide that the maximum salary is $ 76,500. We will never be paid more than 75% of this amount, “says Josiane Parisien.
The two advisers say that the most expensive debts must be prioritized and all credit cards must be repaid first. We must also minimize the mortgage payment if it is possible. The student loan can wait, because it is the least expensive debt, given the 35% tax credit on interest.
“When we get back to work, we have to quickly pay off the debts we accumulated during the leave. If one is self-employed, one thinks of putting pennies aside for the next taxes. “
– Josiane Parisien, financial planner
The need for insurance changes. Josée Lacasse advises taking life insurance, especially if the spouses are not married and do not have a will. “There are some insurance companies that refuse to insure a woman in the third trimester of pregnancy. It must be done at the beginning of the pregnancy or after delivery. This insurance will be very helpful if a spouse is to care for a toddler alone. Since life insurance does not enter the estate, the money will be paid more quickly than an inheritance.
Make a will
Both counselors believe that the will is paramount. Common-law spouses are not recognized. In this case, if one of the parents dies, the only heirs are the children. They will receive the inheritance at age 18 and the spouse will not be able to use the money for the primary needs of the children. If the parents are married, but without a will, the spouse will only be entitled to one-third of the inheritance and two-thirds will go to the children.
Who should take the leave?
The financial impact will be minimized if the spouse who has 90% of his salary takes the long leave. If one of the parents has much higher incomes, he’d better go back to work. “Well, those are the numbers,” says Josiane Parisien. In real life, maybe the mother will not want to leave her 3-month-old baby at home even if it’s with the father. It’s a difficult separation. And if she is breastfeeding, it can be complicated. ”
Attention to emotional financial products
The wealth management consultant Josiane Parisien warns parents against certain financial products that are offered, but are not useful in the first years of a child’s life. When you return to work, paying down your debts is more important than investing in a Registered Education Savings Plan (RESP), she says. “The baby is 3 days old. We receive a call. We are under the spell. We want to give everything to our child. But it’s not an emergency. Even if a parent starts contributing when the child is 9 years old, he or she can contribute double and make up for lost time. With regard to insurance, she said that it is more important to insure parents. “There are people who decide to insure children at birth,” she says. It has no reason to be in financial planning. A child is a cost and it does not bring money home. ”