Baby Steps to Financial Security: A New Parent's Guide
(Six-minute read time)
As you embark on this exciting journey of parenthood, it's natural to focus on the financial factors that come with raising a child. But one thing you may not consider during this time is how crucial it is to start preparing for retirement. In this guide, we'll explore key financial considerations that will help your family lay the foundation for a resilient financial future.
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Why Should I Think About Retirement Now If I’m Still Young?
You may be saying to yourself, “Why plan for retirement? I’m too busy right now with my new family” or “Retirement is so far away, plus I don’t have the money for it right now.” However, there are benefits to starting now:
Time Is Money’s Best Friend
The earlier you start planning for retirement, the more your money can grow over time. You can invest money in a savings account, retirement account, or any investment that offers a return. Depending on the type of investment, over time your money will begin earning returns. Instead of taking those returns out, you reinvest them. Now, your initial investment is not just growing on its own, but it's also growing on the returns you've already earned. Then over time, the money you reinvested starts earning returns too, creating a compounding effect. The longer your money has to compound, the more powerful this effect becomes.
You Can Automate Your Savings
Modern financial tools allow you to automate your retirement savings, making it seamless and stress-free, so you can spend time focusing on your family. It’s as easy as setting up a pre-authorized debit on your account to make payments to your savings on a regular basis. This can be set up as a fixed amount that is the same every month, or a variable amount that is different every month. By adding some money to your savings as soon as you get paid, you are practicing the method of paying yourself first, a very easy practice through the help of automation, which will reward you later in life.
Insurance is Cheaper When You’re Younger
Initiating retirement planning today allows you to capitalize on the fact that insurance is generally more affordable when purchased at a younger age. This is because the younger you are, the less risk, since you are typically the healthiest the younger you are. If you wait to get insurance later, for instance, after a diagnosis, it is more difficult and more costly to get. If you would like to learn more about insurance, check out our article: Getting Approved for Life Insurance in Ontario - What You Need to Know
Where Do I Start? - Financial Steps for New Parents
Initiating financial planning as new parents involves an overall review of your current financial status, taking advantage of specialized accounts, and utilizing time-sensitive benefits.
Gather Your Basic Financial Details
Budgeting is difficult for new parents. If you had a budget before, it’s probably changed, here’s a quick and easy way to get the basics down.
Collect your investment statements, such as your savings and emergency funds. To learn more about investing, read our article: When Should I Start Investing?
Locate your and/or your partner’s work pension information and additional benefits provided by work, such as life insurance
Download your previous copy of bills and your previous 90-day bank transactions (you may be overwhelmed with what you see, but this will give you the quickest sense of where you stand)
Take Advantage of Specialized Accounts
If you are a first-time homebuyer, explore the benefits of a First Home Savings Account (FHSA). Open an FHSA to take advantage of the unique features tailored to those saving for their first home. It's crucial to note that the contribution room for an FHSA only starts accumulating after you open the account. This account provides a tax-efficient way to save for your first home, and starting early allows you to make the most of this opportunity.
Start Early with Time-Sensitive Benefits
Identify and prioritize opportunities that come with time-limited benefits. For instance, consider opening a Registered Education Savings Plan (RESP) to access government grants for your child's education. These grants often have deadlines, so understanding and acting on these time-sensitive opportunities can maximize the financial benefits for your family's future.
These three things will help you begin taking the first steps on the right path. If you get to this point and are ready for financial advice, contact your financial advisor.
Now’s the Time to Get Better About Budgeting
Complete the form, and we’ll send you a downloadable version of our Family Monthly Budget template!
Four Tips for New Parents on How to Grow Savings
Start Small: Begin your financial journey by setting achievable and realistic goals. Starting small allows you to build good financial habits gradually. For instance, commit to saving a modest amount each month or creating a budget that aligns with your current lifestyle. As your family grows and your financial situation evolves, you can adjust your strategy accordingly.
Automate the Process: Set up automatic transfers to your savings or investment accounts. This "pay yourself first" approach ensures that a portion of your income is consistently directed towards your financial goals before you allocate funds to other expenses. Automation not only streamlines the saving process but also helps you stay disciplined in sticking to your financial plan.
Be Flexible - If Things Get Tough, Turn It Down, But Don't Turn It Off: If unexpected challenges arise, such as medical expenses or temporary financial strain, it's okay to adjust your savings or investment contributions temporarily. The key is to avoid completely abandoning your financial plan. Continuously reassess and make adjustments as needed, but maintain a commitment to your long-term financial goals.
Let Family Help (Grandparents Love Contributing): Leverage the support of extended family, especially grandparents who often take joy in contributing to their grandchildren's future. Explore opportunities for family involvement, whether it's contributing to education savings plans like an RESP, assisting with life insurance premiums, or participating in other savings plans. This collaborative approach not only strengthens family ties but also enhances the financial well-being of the entire family unit.
Have older kids? Check out our article: Teaching Kids About Money: A Guide to Developing Financial Literacy in Children
Unlocking Financial Success: The Significance of Early Planning for New Parents
Consider these two families who decide to start their retirement savings at different times but both have the goal of having $500,000 saved up for retirement.
Wilson Family - The Early Starters
Meet the Wilson family, who recognized the importance of retirement planning early in their journey as parents. In their 30s, they decided to prioritize their long-term financial goals. By doing so, they are taking advantage of the time value of money, which allows investments to grow over time.
Wilson Family Retirement Savings:
Monthly Contribution: $500
Investment Period: 30 years (assuming retirement at 65)
Annual Return Rate: 7%
Future Value: $548,294.91
By consistently investing a portion of their income into their retirement savings, the Wilson family leveraged the power of compounding. When it’s ready for retirement, they can enjoy their retirement nest egg that has reached their goal and an additional $48,294.91. Their early planning not only secured their financial future but also allowed them the flexibility to adapt their strategy as their family grew.
Davis Family - The Late Starters
Meet the Davis family, who, busy with the demands of raising young children, only began thinking about retirement planning in their 40s when their kids reached their teens.
Davis Family Retirement Savings:
Monthly Contribution: $500
Investment Period: 20 years (assuming retirement at 65)
Annual Return Rate: 7%
Future Value: $165,586.13
The Davis family realized that the time value of money, which allows investments to grow over time, could have been a significant advantage if they had started earlier. Overall, the Davis family did not reach their $500,000 and have to continue diligently working to create a retirement strategy that suits their circumstances.
By waiting 10 years, the Davis family has to increase their monthly contribution by 75% to meet their goal
When comparing the two future values in both retirement plans, there is a $382,708.78 difference between the two families. This difference is major when considering that the Wilson family will have a much more comfortable lifestyle during retirement than the Davis family.
To be able to access a more comfortable retirement and reach their goal of $500,000, the Davis family would have needed to increase their monthly contributions from $500 to $873 a month; a 75% increase! Not only will their monthly contributions be more, but the total amount of money the Davis family adds to their retirement savings the monthly contributions will be greater than the Wilson family's, and they’ll still have $48,294.91 less savings than the Wilson family in the end.
You can save money now by putting it away sooner. If you don’t decide to save your money now, you’ll have to work harder later.
Disclaimer, this is a simplified scenario to show that starting early can make a big difference. Other considerations, such as inflation rate and taxes, have not been factored in.
Conclusion
Financial planning as new parents requires a gradual and sustainable approach so you can adjust to the many new changes, such as spending habits, that arrive as you navigate parenthood. The top three takeaways for new parents are: insurance is cheaper if you obtain it now rather than later, start thinking about your retirement plan sooner than you think, and take advantage of time-sensitive benefits whenever you can.
For a strong financial future, your plan should be adaptable, consistent, and collaborative. To gain professional and personalized insights on how you can better prepare for your future, such as retirement planning consultation, book a free call with us today.
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