By Leah Golob
The financial costs of raising a newborn can easily turn a happy occasion into a great deal of stress for expecting or new parents. For financial advisors who have clients at this stage of their lives, helping them plan their finances early on in the process could set them up well for what’s sure to be a very overwhelming time.
“New parents are faced with challenges that are tougher than, say, a generation ago because not only are they dealing with the same extra costs of raising a baby, child care and potentially sacrificed career earnings, but they also may be dealing with student loans, higher housing prices and a higher cost of living,” says Morgan Ulmer, a certified financial planner with Caring for Clients in Calgary. “They have an extra challenge on top of what past generations have faced.”
Advisors should be proactive with younger clients, especially couples, early on in the fact-finding phase to see if they hope to raise children in the future. Although clients may not have an immediate answer to that question, it nudges them to start thinking about the topic more seriously ahead of time. That’s important because two years is typically a good runway to start saving for a child, says Sara Zollo, financial advisor with Sara Zollo Financial Solutions Inc. at Sun Life Assurance Co. of Canada in Richmond Hill, Ont.
“If [clients] do give you a timeline, always reflect on your previous notes when you have a meeting to check back in,” Ms. Zollo says. “As they get closer and closer to that reality, you can help them plan and set aside money so they’re able to enjoy that special time.”
Part of that planning means looking at budget cash flow to determine their monthly expenses and if clients can continue to meet these obligations if one of the new parents goes on parental leave. If the answer is no, then it’s important to figure out the difference and start setting aside money in a tax-free savings account or emergency fund.
“You want to be able to get them through that time without drawing down on [their registered retirement savings plans] or accumulating too much debt,” Ms. Zollo says.
Nevertheless, clients may want to consider setting up a line of credit for emergencies in advance. That way, they won’t be relying on higher-interest credit cards if they need extra cash in a pinch.
Part of cash-flow calculations also includes considering how and if to divide parental leave based on the individuals’ earnings within the relationship. There can be many variables involved when making this decision, Ms. Zollo says, but if both partners are willing and able to go on a leave, it’s a good idea to determine which option makes the most sense financially. For example, if the higher-earning partner goes on a long parental leave, that could create a monthly deficit.
Another facet of pre-planning includes helping these clients identify the benefits that are potentially available them, such as the Canada child benefit and the ability to deduct child-care expenses in their taxes, says Sophia Ito, financial advisor at Nicola Wealth Management Ltd. in Vancouver.
It’s hard for new parents to do this sometimes because their focus is on introducing this new person into their home and family life,” Ms. Ito says, “so, the different financial pieces can get overlooked.
A common difficulty for expecting and new parents is balancing long-term savings goals, such as retirement planning and education savings, with increased short-term expenses. If pausing long-term goals is a necessity, reassure parents that it’s not a huge issue and help them keep their intentions of reinstating their savings plans when doing so becomes financially possible again, such as when a parent returns to work, receives a raise or bonus, or when child-care expenses decrease.
“What we don’t want to do is scare new parents into paralysis,” Ms. Ulmer says. Talking clients through this process also helps them to avoid making rash decisions that impact their finances negatively, such as buying too much baby gear, upsizing to a new home or rental prematurely, or stopping contributions to a lucrative employer matching savings plan.
Advisors also need to help clients guarantee their expanded families will be protected via wills and insurance. “This has to jump its way to the top of the list,” Ms. Ulmer says. Clients are prone to putting off wills, but it’s important to remind them they don’t want to leave the decision of who raises their child up to the courts or their families. Likewise, insurance is necessary to help the family stay afloat in the case of death, illness or disability.
One key thing to remember is that couples who are planning to become parents should buy life insurance before pregnancy, Ms. Zollo says. If health problems were to arise during pregnancy, such as gestational diabetes or postpartum depression, clients may run into complications when trying to buy insurance later on.
“I think of financial planning in terms of a pyramid,” Ms. Ulmer says. “Family security and well being is at the very bottom of that pyramid that supports everything. [Clients’] financial plans are on a house of cards, and if their income disappears due to either death or disability, the whole house falls down.”