Why you need to save more money than you thought for your upcoming parental leave
Parental leave benefits in Canada have now been extended to 18 months; the announcement was made by the Government in the 2017 Federal Budget. Now, parents who want to take time off can do so for an extra six months, and still have their job guaranteed.
The catch? There's no extra money.
The same Employment Insurance (EI) benefit afforded to those taking 12 months leave will be spread over 18 months. Currently, employment insurance benefits cover 55 per cent of a parent's salary for 12 months. So, before choosing a longer parental leave there are few financial considerations you should make.
New benefit total
It's important to know, in dollar terms, what you'll receive while off on leave. According to the Service Canada website, the basic rate for calculating EI benefits is 55% of your average insurable weekly earnings, up to a maximum amount. As of January 1, 2017, the maximum yearly insurable earnings amount is $51,300. This means the most you can receive in benefits is $543 per week. Stretched over 18 months that total is $361. Compare that to what you normally make per week to get a fair idea of how much your lifestyle might be affected.
Child care costs
One of the major reasons Canadians might opt to stay home an extra 6 months is the high cost of child care. Across Canada child care costs for children 12-18 months is higher than for older kids. A 2012 national survey done by the Canadian Centre for Policy Alternatives, in Ontario the median monthly fees were $1,152 for an infant, $925 for a toddler, and $835 for a preschooler. For some parents these costs, combined with transportation and other added costs that may be associated with working, means that it makes financial sense for some to stay home an extra 6 months.
While on maternity or paternity leave for 18 months, parents might find it hard to contribute to RRSPs. As well, if you have a work pension, you won't be contributing to it while you're away. Before going on leave, check with HR on how you might keep up your pension payments while you're away — it might be a case of topping up when you are back. Also remember that EI benefits while on paternal leave and any top ups given to you by your employer are considered income and subject to income tax. By not making RRSP contributions, like you normally would, you may find yourself in a situation where you're paying more tax than you anticipated.
Calculate what your life costs … before baby
Before going on leave it's important to know what your life costs month to month. Calculate your fixed costs first: mortgage or rent payments, average monthly utilities bills, maintenance, insurance, car payments, cable, phone and internet — all of these costs will remain. Then evaluate your variable spending on essentials, groceries, transportation and clothing. This should give you a fair idea of what you're spending now to live. By comparing this number to the average benefits you will be getting each month, you can easily see if you need to cut back or if the amount you're getting is enough.
Where to spend and where not to bother
Babycentre.com, an authority on all things baby, says the average cost to raise a child is $10,000. While that may be the case for parents who buy everything brand new, that doesn't mean that this has to be your annual bill too. Talk to new moms about the top items they used and what purchases were a waste of money. Also only buy up to 3 months' worth of supplies and clothes. This way you can reassess at 3 months and decide what size clothes your child needs now, what brand of everyday essentials of diapers wipes and baby soap are working for you, etc.
What cannot be quantified
There is also the intrinsic value of spending more time with your newborn that can't be measured. What does that extra time at home with the baby mean to you? More time to bond and get to know each will have other long term emotional effects. Regardless of how you decide, the new extended leave does give parents options. Just be sure to weigh the financial consequences carefully before saying yes to the extra 6 months.