This is based on a talk given at Healthy Families Day on May 10, 2014
Here are a few tips that can help families maintain financial security now, and for the future. Everyone’s situation is different, so keep in mind that financial planning is meeting your goals using your resources . It’s a fast ride, so hang on -I’m going to touch on Family finances, teaching kids about money, insurance, RESPs, retirement and the importance of writing down a plan and delicious apple pie.
Sometimes it feels like you need a giant calculator in this town. Victoria isn’t the cheapest city in Canada these days and can require some inventive number crunching. Everything from housing to food seems to cost more than it does in other towns. My dad likes to keep pointing out how much land and house we can buy in Martensville, Saskatchewan, compared to Victoria. Which doesn’t help much, dad. :D (And no, he lives here, not there).
As a mom of a one-year old with another one on the way, I’ve entered the world of having dependents - and I mean ones who really can’t help themselves, even though sometimes it feels like I’m taking care of my husband. :) All of a sudden (ok, I had about 9 months to prepare), there was another person I needed to clothe, feed, house, entertain and protect.
Here is the secret to how we stay financially stable: we spend less than we make. I know. It’s a shockingly easy concept but one that surprisingly few people follow. There’s a lot of credit card purchases and keeping up with the Joneses - and I won’t say I’m not guilty of this - but at the end of the month, if you’re spending more than you make, you’re going to fall behind. And it gets increasingly difficult to get out of that hole once you’ve fallen in.
According to the Victoria Real Estate Board, the median single family home in Victoria last month was $550,000. Even at low interest rates, many families are finding that home ownership isn’t in the cards in the immediate future. The 2010 median family income was $77,000, which translates into less than $400,000 for a home purchase, with a $50,000 down payment (a whole other issue). As a double-income family, you also need to factor in child care costs to boot. Fall 2013’s Child Care Resources & Referral Victoria stats show that the average daycare costs for a toddler are about $900/month. Remember how I talked about the big calculator? Raising kids isn’t a cheap endeavor, as this MoneySense article shows.
So, what’s a young family to do? Well, going back to my big secret tip - spend less than you make. I’ve seen pretty creative solutions here - moving back in with parents, taking on a homestay student, sharing childcare with another parent, working split shifts or evenings/weekends. Whatever you need to do to live the sustainable lifestyle you want and balance your priorities. It comes down to priorities and goals - home ownership may not be one of your goals but travel is - how are you getting to Mexico if you don’t have the cash? (And please don’t say your credit card!).
This doesn’t need to be a depressing topic but it does require discussion with your partner or family to agree on a financial goal and a financial plan. And the discussion shouldn’t stop with your partner - involve your kids. Show and teach them early that money doesn’t grow on trees. Think about the language you use. “We can’t afford it” may be true but doesn’t demonstrate to children the reasoning behind a decision. “We aren’t buying those cookies because our family food budget is for fruits and vegetables and meat. For a treat, we already bought ice cream. Would you prefer we traded ice cream for cookies?” You may not like the “B” word, so use “priorities” or “choices” instead. As a family, you choose to buy/do X instead of Y. Children need to learn how to prioritize in life and having the skills to make financial decisions early will serve them well later. Children see everything and will watch you make impulse purchases and use the credit/debit card. Using cash when possible (I know, it sounds archaic) and vocalize why you are/aren’t purchasing something sends a message to impressionable young minds.
As an insurance broker, I’d be remiss if I didn’t mention something about insurance. In a nutshell - if you have dependents, you should think about the financial impact of your sudden income loss. This includes if something happened to your spouse - even if one of you isn’t earning an income. One calculation of a stay-at-home mom’s “salary” (if she earned one for the work she does) is approximately $60,000. So really consider the financial value of all parents. And by income loss, I’m not just talking about insuring against death with life insurance but also disability and critical illnesses, like cancer. Talk to an insurance professional to explore your options so at least you are informed.
Almost as hot a topic in some parent circles as vaccinations - RESPs are next on the list. I know many a parent determined to set up an RESP the second baby is born. Which is admirable - education costs are not getting any cheaper. A baby born in 2013 is looking at $140,000 for a 4-year post-secondary degree in 18 years. When I was interviewed about this last year and my plan to save, I pretty much told the reporter my son was getting a paper route at age 10. I’ve also started an RESP which is a great vehicle for savings. The government allows you to contribute money into a plan that grows tax-sheltered until it is withdrawn (at which point, it is taxed in your child’s hands - which should be a low tax rate since they are a student and likely not earning much of an income). Some great things about RESPs are that anyone can open one (parents, grandparents, friends, aunts/uncles) and the government will give you FREE money. First, there’s a 20% match, so you can get $500 a year put in the plan for about 14 years then there’s a $1,200 bonus the year your child turns 6 AND if you’re low income, there’s some extra money you may be entitled to as well. And did I mention it all grows tax-sheltered? This means there’s no tax to pay until the money is withdrawn. You can open an RESP through your bank or a private investment company or advisor. Be sure to ask lots of questions about fees and restrictions if opening an account that has a set-up fee or promises bonuses.
Besides saving for our children’s education, which many of us do as soon as we can, something many of us think about too late is our retirement plan. I know, it seems crazy to be talking retirement when clearly I’m so far away from it, but it’s one of those things that needs to be thought about and started early. The sooner you start, the faster your money will grow, it’s like a snowball - it’ll keep accumulating the farther it gets down the hill. The farther it has to go - the more that will accumulate. If you wait until age 45 to start saving, you’re not giving yourself a lot of time to make your money work for you. The magic of compound interest is that interest is paid on top of interest. And the magic of a registered account (like an RSP or TFSA) is that the interest or growth isn’t taxed while it’s in the plan.
A quick review of an RSP vs. TFSA - a registered retirement savings plan is made up of pre-tax contributions - if you use already taxed money, you’ll get a credit at the end of the year and possibly a refund on your tax return. A Tax-free savings account uses after-tax money. The major difference is that when you withdraw the money - you’ll pay tax on the RSP money and none on the TFSA money. The contribution amounts are different as well: RSP maximums are 18% of last year’s income (up to maximum of $24,270 for 2014 - although you probably have contribution room from previous years you can use - check your NOA), TFSA maximums are $5,500/yr and does not require any earned income (anyone over age 18 gains room).
Both accounts tax-shelter your money and both accounts allow you to invest in GICs, stocks, bonds and mutual funds, therefore, you can make the exact same return on your money within each plan and have the same investment in each as well, if you wanted. Which account is right for you depends on your situation, goals, and income.
To summarize - spend less than you make, set a good example for your kids, protect your income and save early to secure a financial future but above all, have a written financial plan to guide you.
Think about making an apple pie - you probably know what ingredients are required but if you just wing it in the kitchen (like I often try to do), when it comes to baking, you often end up with some sort of mess. Having a recipe to follow (aka “financial plan” in this example!) results in a much better result. And apple pie tastes more delicious when it’s carefully made instead of thrown together.