Author: Mike Holman

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Baby Expenses

Dealing With Less Income – Baby Expenses II

The post is part of the Baby Expenses Series. See the entire series here.

This baby post was unplanned (pardon the pun) – it resulted from a comment left on yesterday’s post.

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Money Gardener left a comment in yesterday’s post asking how I handled the lack of income while I was on parental leave – quick answer is “not very well” 🙂.

The good news is that it was more or less temporary because I got a “top up” from work during my time off, the only catch is that I didn’t get the money until I went back to work but taking a short term loan to cover was not expensive. Between getting EI benefits and the top up (100%) I ended up getting full pay although I had to wait a while to receive it all.

 

A more typical scenario involves the mother taking a big financial hit by not getting paid for a year except for EI payments. Even if they get a top up from work, usually it only lasts for a fraction of the maternity leave. For dad to take even a month off at no pay (I’m assuming no top up), it might be pretty tough. Unfortunately there is no easy way to handle this.

 

Although it’s different for every family, this is the one time I would suggest that taking on some debt to cover a short unpaid parental leave (say one month) might be worth it. My reasoning for this is that you won’t get too many opportunities to take parental leave so you should try to take advantage of it. Once both parents are back at work then they will be getting their full pay (minus daycare) so the extra debt can be dealt with then. Obviously if your finances aren’t very strong to begin with then this might not be a good idea.

Most of my friends who had similar situations basically cut back expenses as much as they could, borrowed if they had to, even cashed in some rrsps if necessary (this isn’t such bad strategy if mom’s income is low for that year, although it should be avoided if possible). I also know people where the mother had to go back to work early because they couldn’t afford the one year maternity leave.

My best advice for couples who are thinking about having kids sometime in the future is to work on improving your finances as much as you can. The better shape your finances are in, then the more options you have when it comes to things like maternity leave and parental leave.
Next Baby Expense post.

Previous Baby Expense Post

Categories
Baby Expenses

Maternity and Parental Leave – Baby Expenses I

The post is part of the Baby Expenses Series. See the entire series here.

In Canada, new mothers are allowed by law to take 52 weeks off from their jobs. This time off is called maternity leave. During that period they are eligible for employment insurance (EI) benefits which are calculated as 55% of their normal earnings up to a maximum salary of $40,000. Some companies also offer a “top up” which usually involves paying the difference between what the mother gets from EI and some percentage of their normal salary. The top up amount and duration will vary from company to company – I’d be interested to hear what your company offers?

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New fathers are allowed to take up to 37 weeks off which is called parental leave however the EI benefits that are paid out have to be shared between the mother and father so they can’t both collect EI benefits at the same time. In my case my wife didn’t qualify for EI since she wasn’t working so I was able to collect EI benefits when I took my parental leave. The “top up” feature available to new mothers at some companies is also available to new fathers in some cases. At my company, most dads don’t get any EI since their wife gets all the EI benefits so their top up is calculated as though they were getting EI.

One misconception which I’ve heard from a number of my friends is that the time off has to be shared between the two parents and can’t total more than a year – this is not true, only the EI benefits have to be shared.

The EI benefits is calculated as 55% of the mother’s salary up to a salary of $40,000. The first two weeks of the maternity leave are unpaid so the EI benefits actually start on the the third week. My salary is more than $40k so I received the maximum benefit which is $413 per week. The actual payment after tax ($48) was $778 which I received every two weeks. In my case the withholding tax wasn’t enough but I think my company adjusted for it because I didn’t owe anything at tax time. You should keep in mind that you might end up owing some money at tax time because of this. You can get the withholding tax increased if desired.

The way to apply for EI is to go online at here. This contains all the steps you need. It also contains a link to the Quebec parental insurance plan which is different than for the other provinces. Basically you go online and fill out the required information and they will send you a pin number which will allow you to go here and see your online information. One of the items you will need from your employer is a form called “Record of Employment” which basically lists your financial employment for the past year. I went into my local Service Canada Centre when I got this form in order to complete my application. Applying for EI is not something you can do in advance, you have to wait until you have finished work before applying.

Something to keep in mind is that it will take about four to six weeks to get your first EI benefit deposited into your bank account, so don’t count on getting any money right away. Usually once you start getting them, you’ll get two or even three payments right away and then every two weeks after that.

When I was receiving EI benefits, I used the reporting feature of the online account to fill out my report every two weeks. This report basically says that you aren’t looking for work, are still not working etc. However in researching this post I realized that you can sign a declaration of exemption when applying which means you don’t have to fill out the reports every two weeks.

Tomorrow, I’ll be starting a series of posts where I take a look at the essential items that new parents should have.

Next Baby Expense post.

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Announcements

Baby Theme Week

Thanks to a comment from Money Gardener who is one of my regular readers and commenters and will also become a dad in January, I decided to do a post on baby related expenses. I’ve had this topic on my list for a while but I’m glad to be doing this now because the older your children get, the more you forget about their younger days. My little guy turned one recently so hopefully I’ve been able to remember most of the pertinent financial information.

See the first post here.

The baby post ended up turning into several posts and I found I was really interested in this series so in the spirit of things I decided to temporarily change the name of the blog along with the header until the series is over. I can’t believe how many baby related expenses there are!

I realize that most of my regular readers probably couldn’t care less about baby expenses but hopefully they can add something in the comments that I’ve left out or correct errors.

On another note – I want to point out that I somehow managed to get a listing in the exclusive Carnival of Personal Finance hosted by Frugal Law Student so check it out.

A couple of other blogs I follow also have posting on the Carnival – Brip Brap and The Financial Blogger who ironically became a new dad on the weekend – congrats!.

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Book Review

The Trouble With Prosperity – Book Review

This is another book in the Bernstein recommended list and the second book I’ve read and reviewed by James Grant. The other review was Money of the Mind.

Along with being an author, Grant is also the founder of Grant’s Interest Rate Observer, an investment newsletter based in New York City. As one might expect, books written by a guy who sits around and observes interest rates all day long, might not be that exciting. I’ve concluded that although he is a good writer and his books contain tons of research – he’s no Clive Cussler. Ironically I was reading a Cussler novel at the same time I was trying to read this book.

For the record, I managed to get through two thirds of this book and just skimmed the remainder, so needless to say I don’t recommend it unless you are absolutely desperate for an insomnia cure.

The premise of the book (not that it really matters at this point) is that Grant is of the opinion that there are natural business cycles which shouldn’t necessarily be interfered with as much as governments and central banks tend to do. In particular he says that when there excesses created as a result of good times (his theme in Money of the Mind), it’s important that when the inevitable recession or depression occurs that it be severe enough to “clean up” all the inefficient investments, companies etc. If the central bank works too hard to soften the blow then it only prolongs the inefficiencies. He uses Japan as a prime example of a country where the banking system was sorely in need of a major overhaul after that country’s great economic success in the 80’s but as we’ve seen, Japan never had the major downturn that might have let them fix their problems and then grow normally.

Although I don’t disagree with his logic I’m not sure I completely buy the fact that you have to make every business a lean machine before heading into the next upswing. If you only have a mild recession after a long up cycle then there will be companies that are not all that efficient staying in business, but the way I look at it, if the market values them accurately then someone will come along and buy them and make them more efficient.

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Personal Finance

Reduce Finance Tracking

In a previous post I talked about my method of tracking our household cash flow in order to determine if we are spending more or less than we earn. I also keep track of our spending that occurs on our visa as well as automated debits from our chequing account.

As worthwhile as I think those exercises were, I stopped doing them for the simple reason that I’ve been stressing out too much over our finances as a result of following them too closely. In particular, when following the individual expenditures I tended to get upset if we had unplanned expenses which affected our cash flow. Now I don’t want anyone to think that we are just going ignore our finances – far from it! We aren’t going to change our spending habits and the plan is to look at our bank account at the end of the month, figure out how much “extra” money we have and hopefully put that money into the mortgage. This “extra” money at the end of the month should be an indirect proxy for the cash flow calculation and will tell us how much we’re saving each month.

It was very educational to keep track of the expenses and cash flow for the last six months and hopefully we’ll do it again sometime in the future.

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Personal Finance

RRSP Contributions

After getting some interesting comments yesterday in my post about what to do with my year end bonus I decided to do a post about rrsp contributions and the best way to do them.  Please check this page out for up to date rrsp deadline information.

One of the suggestions was to put the bonus into the rrsp and use the tax refund to pay down the mortgage. I’m not a big fan of this rule of thumb because it doesn’t necessarily fit everyone’s situation. Some people should put all their extra money into their mortgage and forget about their rrsp. Others should do the opposite and put it all into their rrsp. Most people should probably do some combination of rrsp contribution and extra mortgage payments.

Most people make rrsp contributions by setting up an automatic withdrawal plan from their bank account. Then they will recieve a tax rebate the following spring which is not a good thing because it means that you have made an interest free loan to the government. Another problem is that if you are trying to maximize your rrsp contribution, it is difficult to do with after-tax money. If you can make the contributions with your pre-tax then it will be a lot easier.

A better way to contribute is to get your company to reduce your income tax deductions at the source (your employer) by an appropriate amount so that you pay less tax on each paycheque and will not get a refund at tax filing time.

How do you do this? Most companies that have group rrsp plans will be able to accomodate this if you are contributing to the group rrsp plan. It’s best to talk to your payroll department to see what they can do.

Another option is to fill out a government form T1213 – you send it in and they will send a letter (hopefully) allowing your employer to reduce your deducted income taxes. This can be done on salary or a lump sum amount. This form has to be filled out once a year.
Obviously if you get a reduction in your income tax then you have to make sure you actually make the contribution otherwise you’ll owe quite a bit of tax the following spring.

An example:

If Sue is in the 40% tax bracket and decides to contribute $500/month then her employer will reduce the tax deducted by $500 * 40% = $200 per month. By doing this she is contributing the $500 from her gross salary, not her after tax salary and will avoid giving the government an interest free loan.

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Personal Finance

What to do with Xmas Bonus?

I get a year end bonus which normally adds about 10% to my annual salary. It’s a bit early to be thinking about what to do with it but I’d thought I’d write a post since I can’t decide. Basically the choices are to put it into my rrsp or my mortgage or split it up and do both.

Up to now this money has always gone in to the mortgage and in some cases paid for vacation trips.

This year I’d like to only use it for mortgage and/or rrsp and nothing else. Since I feel my mortgage is excessive and I worry about it a lot more than the size of my rrsp, it seems like a no brainer to put the money into the mortgage. However at the same time if I put it into the mortgage then that means I’m paying a lot of tax (43.38% to be exact) on it, which I can defer if I put it into the rrsp.

One of the strategies I was thinking about was to see how the markets perform this year and perhaps decide based on that. For example if my rrsp (I’ll use my portfolio as the index) does better than say 5% then I’ll put all the money into the mortgage – I’m thinking that considering how well the markets have done, if they continue to do well then maybe they should be avoided. Bernstein says to buy when things are looking their worst – not at their best. On the other hand if the rrsp goes down at least 5% this year then I’ll put the whole bonus into the rrsp. If the return is between -5% and +5% then I’ll figure out some ratio and split the bonus between the mortgage and rrsp.

A couple of other things – even without the bonus we make quite a bit of extra mortgage payments. We also contribute a fair bit to the rrsp on a normal basis . Regardless of the my choice, neither the rrsp or mortgage will be ignored!

Any opinions?

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Announcements

Carnival of Personal Finance

I made it into the Carnival of Personal Finance today which is being hosted over at Plonkee Monkey’s blog. My post about looking for a house called “House Wars” was entered.

Feel free to check out the carnival!