I’m going to copy Million Dollar Journey here and ask a question for a Saturday.
I’ve had a few comments & questions on RESPs and wanted to know if there was any interest in detailed series on the topic. There is a ton of material to cover so it would take probably a half dozen posts or so. Unlike the baby series I would spread it out a bit ie one post a week.
Anyways, let me know what you think via comments or email.
I got tagged by BripBlap to give my MOMA or “my one money advice” which is supposed to be the one piece of advice you would give if you could only give one piece…luckily I’m not normally so constrained!
First of all, I wanted to say a few things about BripBlap which is one of my favourite blogs. It’s written by a New Yorker and covers all sorts of topics, some of which are financial, some not. This post totally changed how I read to my son and the choice of reading material.
That said – on with the advice! My advice is to make sure that when you are making a financial decision of some sort ie buying something, entering into a service agreement etc that you spend an appropriate amount of time researching and thinking about it. Some people will spend incredible amounts of time trying to get the best phone plan on their cell phones which might save them a few hundred dollars at best per year but they won’t spend any time researching the best ways to buy a new car. If you know what you are doing then you can potentially save thousands on a new car compared to if you went into the dealership cold.I’m not saying you shouldn’t worry about the cost of your daily latte or the price of bananas but things like houses, renovations, cars, investment costs etc are the big things that will affect you the most so you should spend the most time on those items trying to get the best deal. Cell phone plans do fit on the financial priority list but just make sure you know where it is on the list and how much time to spend on it.
I’m a big fan of William Bernstein who wrote the book “Four Pillars of Investing”. One of the main points of the book is the idea that whatever your asset allocation is (ie 50% equities, 50% bonds) , you have to maintain the equities portion of your portfolio regardless of what happens to the market. This is easy enough to do when the market is flat or going up, but when it drops then it gets a lot harder.
His suggestions to accomplish this are as follows:
Study history: If you are familiar with the equity markets then you know that the long term trend is upward which means that regardless of what happens in the short term, over a long enough time period you will get through the ups and downs and achieve a decent positive return. Another part of history that is important to know about is market manias and the ensuing crashes. Knowing the history of these events from the tulip bulb mania of the 1600’s to the dot.com mania of the late 1990’s will allow you to know that the market always recovers and even if you do get caught up in a mania, if you stay invested in equities then you will do fine. Note that that by “equities” he’s talking about a widely diversified portfolio of equities.
One of his examples from the book “Four Pillars of Investing” uses the great crash of 1929 to demonstrate that if someone retired at the peak of the market in 1929 and had mostly equities in their portfolio (which lost 90% of their value), although they would have had a few lean years afterwards, if they had stayed invested in equities then they would have done just fine and wouldn’t have run out of money. If they panicked and switched into bonds or cash after the value of the portfolio went down, then they would have eventually run out of money.
Another psychological point Bernstein talks about is picking an asset allocation that you are comfortable with even in the bad times. He says you are best off having an equity allocation of 50% to 75% with the higher number being preferable in order to beat inflation. However if you can’t handle the volatility and switch out of equities after the markets crash and then wait until they are up again before switching back in, then you are losing money and you should lower your allocation of equities. You are better off with a lower allocation of equities that you can maintain during a market crash rather than a higher equity allocation that causes you to panic in bad times.
Some of my suggestions are:
Don’t focus on individual securities:
If you are going to monitor your investments then look at the total value of your portfolio including cash, fixed income, equities etc. Don’t just look at the individual funds. If you have a diversified portfolio then not everything will have the same loss so the total value is the relevant number to watch. Not all stock indexes dropped the same amount recently and if you have a portion of your portfolio in fixed income or money market funds then they should have held their value (unless of course you own National Bank money market funds).
Put market drops in the proper context:
Keep a record of your historical portfolio balance. You can either include contributions or not for this exercise. Investors who watch their investments closely in an up market tend to remember the highest recent value that the portfolio gets to and when it falls, they compare the new lower value to the recent high. If you keep track of your total portfolio value and write it down say every six months then you can get a more realistic picture of your investments. For example I know that my portfolio is down around 7% from it’s recent high but I also know that it’s still up about 0.5% from the beginning of the year. If I look at my records (I do a yearly performance analysis) then I can see that I’m still up about 15% (not including contributions) from Jan 1, 2006. Taken in that context, the 7% drop is not that big a deal.
Measure the volatility of your portfolio before it crashes:
You can’t have volatility on the upside without having it on the downside as well. There are many advanced mathematical tools to figure out the volatility of your portfolio but one simple rule is to measure how much your portfolio goes up in a good year and be prepared for it to drop that much in any given year. If that amount doesn’t appeal to you then choose a more conservative asset allocation.
The post is part of the Baby Expenses Series. See the entire series here.
See all RESP posts here.
RESP is a type of investment account in which all income and growth are tax sheltered until the time of withdrawal and there are government grants which equal 20% of the contributions.
One bit of advice is not to worry about contributing to an resp right away unless you are on solid financial ground. Make sure your own finances are secure before you start saving for a future uncertain cost. I’ve found that opening an account does allow relatives (read grandparents) a great avenue for gifts so that’s one reason not to wait too long.
You have up to 18 grant contribution years starting in the year where your child is born or 1998 whichever is later. The last year you can get a grant is the year when they turn 17. Each of those years, the child accrues $2500 of eligible “contribution room” which means they will receive the 20% CESG grant. In any given year, they can get a maximum grant of $1000. For example if a child is born in 2007 and the parents start the resp in 2008, they can contribute $5000 right away and get $1000 in grants. Lower income families are eligible for more grants as well.
When the money is withdrawn by the student, the original contributions are tax free (since they were already taxed) and the growth and income portion is taxed in the hands of the student. If the child does not go to school then the subscriber of the account can collapse the account and get the original contributions returned tax free and the growth and income portion will be taxed at their marginal tax rate + 20%. In that case the grants will be returned to the government. One thing to keep in mind is that the resp doesn’t have to be collapsed until the 26th year so even if you know the kid isn’t going to school you can delay the collapse and hopefully time it with retirement which would really cut down the tax bill.
I think these plans are a great way to save for your child’s education because of the government grants as well as the fact that no taxes will be paid on the account until withdrawal – and even then the growth portion of the account will be taxed in the hands of the student, not the subscriber. There is the risk that the child will not go to school which would be a problem because of the taxes involved. However I’d say that one way to look at it is to think about how much money you will get back from the resp if the child goes to school (zero) and how much you’ll get back if they don’t go to school – not as much as if you had just invested it outside the resp but it’s still a lot more than zero.
You can set these accounts up at pretty much any bank although I think the discount brokerages are the best place for these since they give you easier access to low cost index funds. TD e-funds are the best choice for these accounts.
I would suggest having a high component of equity in the beginning (I have 100%) and then gradually switch to be more conservative over the years. I would think by the time the child is about 14, the account should be mostly money market or short term bonds.
Warning – Don’t buy into group pooled plans since they are not a very good deal. If you are already in one then don’t worry about it, it’s not worth changing.
The post is part of the Baby Expenses Series. See the entire series here.
Life insurance:
Once you have a baby then your life insurance needs will probably increase. Obviously you don’t need to have a baby before getting life insurance but it’s a pretty typical time for people to start thinking about it. I have a couple of posts planned on this topic which will go through the calculations that I went through for my own life insurance. I would suggest that you don’t delay getting this because it can take quite a while from the time you call an insurance company to the time you get covered – probably one month minimum. Just get term insurance, universal or whole life insurance is not worth it.
When – start working on it once you know you are pregnant. If Dad kicks the bucket before the baby is born then the need for life insurance is still there.
Cost – depends on how much you have and how long and how old you are and your health etc etc. For someone in good health in their 30’s you can get $250k for about $20/month.
Hospital rooms and parking:
At our hospital shared rooms cost $205 per night which was covered by my work benefits. Private rooms cost $45 more and we elected to pay the extra cost. Because it was fairly busy when we had our baby, there were no private rooms available the first night but for the second and third night we got a private room. Phone calls were $2 each and we just noticed that we got charged $16 for something called a “birth journal” which we never got.
Parking cost us around $18 per day which is quite a bit so you have to consider this as well. This might be dependent on the region, I was recently at a hospital in a smaller city and the parking was only $3 which is pretty insignificant. Another cost is food, our hospital had a fairly good cafeteria with reasonable prices but it’s probably more money then you would have spent on food at home.
One note on the room costs and parking – don’t assume you will be in the hospital for just one night. If you are planning a regular birth then they will probably tell you that it’s one night, however if anything changes or there are any kind of irregular readings then they will make you stay longer. I have several friends who ended up staying in the hospital for 5-7 nights because of irregular test results – the babies ended up not having anything wrong with them but the doctors are very cautious with newborns. In our case we ended up getting a C-Section which meant a mandatory three day stay. I have to say that I didn’t mind being in there for three days because you have the benefit of the nurses when you run into problems. Usually the first 24 hours, the baby is sleeping most of the time and relatively quiet and you will start thinking that this isn’t so hard. Then the screaming begins… 🙂
Pre-Natal Courses:
My wife and I took two courses – one was a course on the actual birthing experience (labour) and the other was about how to care for a newborn child. I had been told by numerous friends that these courses were a complete waste of time and sure enough they were. I don’t remember the exact costs but I think they were about $180 per couple for each course.
The birth course is a waste of time because your actual experience will probably not resemble the “normal” experience. The other thing is that when you have a baby, you don’t have to know anything – the doctors, nurses etc will tell you what to do and when to do it.
The child caring course was a bit better but the one thing I wanted to learn from it was how to change a diaper and they didn’t cover it.
Books:
Most expectant parents will buy a book or two and pregancy, labour and caring for a newborn. This is a worthwhile effort but I would suggest not reading too many books since (like finance books) they are often contradictory. Try to borrow books from friends or sign them out from the library. We read “What to Expect When Expecting” and thought it was pretty good.
Tomorrow I’ll finish off the baby theme week with a post about RESPs.
The post is part of the Baby Expenses Series. See the entire series here.
This is a list of items that either we used or things that I know people typically get with a new baby – I’ve indicated whether I think it’s mandatory and the timing of when you need it. I’ll put an approximate price for new items which is generally on the lower end – you can spend much more if you want . I’ve split it up into a number of posts which is in keeping with my tradition of not having excessively long posts.
Clothes: It’s hard to list a definitive list of the exact clothes you will need since the season the baby is born will be a big factor in this category. Our child was born in the summer so we needed a lot of onesies and sleepers. These are the basic clothes that your child will wear. Our little guy didn’t wear any pants for a long time but a winter baby probably will need these more. Shirts or sweaters will long sleeves would be appropriate for the winter. Add in some socks and you’ve got your indoor wear. The number of outfits is debatable since it depends how much washing you want to do. Newborns can go through several outfits a day so this is one area where it doesn’t hurt to have more. For outside, a jacket and blankets, mitts and a toque are necessary. If you are travelling somewhere in the car then you don’t really have to put the kid in a snowsuit since you can just bundle up the car seat with extra blankets. One more thing about clothes – the sizes don’t mean very much. You really have to look at the length of the clothes and the baby and figure out if it will fit.
Hats: in the winter you will need a couple of toques, in the summer you’ll want a couple of sun hats or baseball caps plus suntan lotion.
Nail clippers: These are very important since the baby will probably need a clipping as soon as they are born. Usually a weekly clipping is sufficient.
Blankets: Some baby sized blankets are necessary. These can be purchased or you can just cut up some larger blankets if you want.
Baby wash cloths & towels: You can use normal ones but having smaller sized items is a bit more convenient
Sleep Sack: This is like a sleeping bag for the kid. Very useful for the winter months.
Toys: I’m not a big fan of toys for newborns for two reasons – one – they don’t need them and two – this is one of the main “default” gifts that you will get. I can guarantee that you will get at least one toy that will clearly say on the box “ages 3+” for your newborn from some well meaning relative. Once they get a couple of months old it doesn’t hurt to have a few toys but don’t go overboard.
This concludes my list of specific baby items that you might want – if there are any that I missed that you found useful (or not) then feel free to comment.
Some other costs:
Food: This will depend a lot on whether the baby is breast feeding or using formula. When breast feeding, the mother will require about 500 calories more per day so that will increase your food bill a little bit. I don’t personally know the costs of formula but according to Canadian Financial Stuff it costs around $25 per week. Don’t assume that you will be successful at breast feeding, this is one of those things that we had assumed would be quite easy since it’s a natural process but unfortunately nobody told us how difficult it would be. We had all kinds of problems with breast feeding for about a month, I wanted to give up and go to formula but my wife hung in there and made it happen. My advice to new parents with respect to breast feeding is not to assume it will be easy and to make use of the free breast feeding clinics that are available.
Usually around six months the child starts on baby food and then normal food. Hard to quantify this but I would say that from six months to one year he probably adds $15 per week to the grocery bill on average.
Diapers – $60/month – We use Teddy’s brand from Loblaws which is $25 for 168 diapers + $10 per wipes. This goes down over time but at one year, they still go through quite a few diapers.
Tomorrow we’ll keep going with “other costs”.
Just wanted to let you know there will be no post on Friday. I’ve been out of town and very busy and I haven’t gotten my post ready.
Monday I’ll have my last post for baby items – then a few posts on other baby related costs like wills, insurance, resp etc.
I wanted to leave you with one thought for the weekend – I’ve spent a fair bit of time in the last few days visiting in a hospital which I found quite depressing because of all the sick people there. It made me realize that while there is nothing wrong with sedentary activities like blogging, surfing, reading & watching tv, it’s important to take advantage of your physical abilities while you still have them. There will come a time when all you will be able to do is watch tv, so I think it’s worthwhile to make the time for walking, hiking, gardening – whatever physical activities you like to do, because someday those options won’t be there for you.
On that upbeat note – have a great weekend!
Another post in my “baby theme week“.
This is a list of items that either we used or things that I know people typically get with a new baby – I’ve indicated whether I think it’s mandatory and the timing of when you need it. I’ll put an approximate price for new items which is generally on the lower end – you can spend much more if you want. I’ve split it up into a number of posts which is in keeping with my tradition of not having excessively long posts.
Baby Carriers:
We had several of these that were all borrowed and we ended up not using any of them. I’m not sure why they didn’t catch on but I guess we were both satisfied with using the stroller or carrying Junior around. If we have another child though we are going to make more of an effort to try a carrier since it seems like a pretty good way to move the kid around. Carriers are better when the child is younger (and lighter) so probably the first four months is the best time for this. If you have a winter baby then it might be more useful since you’ll want to keep the little bundle of joy warm when you go for a walk. Our little guy was born in the summer so that’s probably one of the reasons we didn’t use the carrier very much.
When: Newborn to ??. It really depends on the parents and how much weight they can carry. I would think that somewhere between 15-20 pounds would be the maximum.
Cost: $30.
Diaper bag:
This is yet another product that I had no idea existed before having a kid. The main benefit of a proper diaper bag is the different compartments which can hold things like bottles, diapers (duh!), wipes, toys, food, extra clothes etc. We used a cloth bag for the first few months since all we had for the diaper bag was an extra set of clothes, some diapers and wipes. If your baby is on formula or is a bit older (six months+) then the proper diaper bag can come in handy as you will need to bring more “stuff” with you when you go out with the baby.
When: As soon as baby is born.
Cost: $25
Vibrating chair:
We actually had one of these things (borrowed) – more like a chaise lounge for the newborn set or “electric chair” as I liked to call it. I wouldn’t recommend going out and buying one, but it was pretty neat and Junior seemed to enjoy it.
When: After baby is a couple of weeks old. They will outgrow it pretty quickly so you might get two or three months out of it.
Cost: $50.
Bumbo:
This is definitely the most overpriced piece of foam ever. It’s kind of useful since it will hold the child in place so you can leave the room or just get a break. We used ours for the bath (you’re not supposed to) and it worked ok for that. We bought it on a gift card but we could have bought diapers with it instead.
When: Around three months.
Cost: $65 at Toys’r’Us.
