Financial Strategies for the New Stay at Home Parent
With most households these days generating income from both spouses, it can be a challenge to switch to the single income when the need arises. Such as having multiple children or losing employment. The biggest reason for the challenge of dropping to one income is that dual incomes typically result in a lifestyle that matches the higher household income. Even though the drop in income may be challenge, families do it all the time, it’s just a matter of making it work.
The first year of maternity/paternity leave can be buffered by employment insurance benefits, but even that requires planning. But what I’m talking about is after the first year, how does a family plan for reduced income for years to come? Some families choose to have one spouse stay at home until the children go to school which can last at least 5 years or more depending on how many children they have.
On a personal note, when we had our first child, my wife took a year off work. At the end of that year, we decided that my wife moving to part time work made sense. It would allow her to maintain her professional status, while spending quality time with our baby. Depending on the salary, while working part time does bring in an income, the reduction can still hurt, so we had to do some planning. We reviewed our spending, searched for ways to reduce unnecessary expenses, maximized our child benefits, and actively looked for ways to increase our income.
Staying true to my internet handle, over the years, we have developed many ways to save money. However, with a significant income cut, it was time to get more aggressive. One benefit of reduced work hours is that work related expenses will decrease. That is, there will be savings in gas usage, eating out during lunch, business clothing and retirement contributions. As a result, we cooked a lot more at home, spent less time in stores, and focused on our “needs” rather than our wants.
In addition, with a spouse at home, it eliminates day care costs which can be rather expensive. In NL, for a 2+ year old, it can cost $750/month per child and more for a child under 2. Compound that with multiple kids and it doesn’t take long before having one spouse stay at home can make sense.
Government Child Benefits
For families with children, there are a number of government programs to reduce the financial burden of having kids. To start, the Federal Government offers a bit of income support for families with children with their Universal Child Care Benefit (UCCB) and Canada Child Tax Benefit (CTTB). The UCCB offers $100/month for each child under the age of six and the CTTB (tax free) monthly payment varies based on family income (here is a calculator that may help).
In addition to income support, there are tax breaks for single family households. There main being the spousal amount with which the higher income spouse can claim in the case that that the stay at home spouse has little or no income. That’s in addition to the tax credits available to all families, such as the fitness tax credit, the child care deduction (baby sitters etc), and the $300 tax credit/child/family offered by the Federal Government.
Check out my post about child care benefits for more details.
With a lopsided family income, it brings the opportunity to take advantage of income splitting strategies. Without getting into too many details here, the higher income spouse can contribute to the other TFSA, a spousal RRSP or even loan money to the lower income spouse at historically low rates (currently 1%). Here’s a post with more details on income splitting strategies.
Make More Money
Perhaps one of the more obvious solutions to a reduction in family income is to look for ways to earn more money. A little bit of overtime, or maybe a part time side business would go a long way to balance the books.
One idea is for the stay at home spouse to start a home day care. There are a lot of Government regulations but it’s a way to bring in some extra income. In NL, the limit is four children under seven for unregulated and up to eight for a regulated home day care. Four to eight kids with parents paying $750 per month can certainly cash flow after all expenses. An extra bonus is that the portion of the home used for the day care is tax deductible. Note that each province has their own child care rules and regulations.
Do you have a single income household with kids? How do you guys make it work?