How to avoid diaper debt: don't let your baby make you bankrupt

So you're having a baby. Congratulations! To collect this once-in-a-lifetime gift, please insert $10,000.

What?! Can someone say reality check? When many of us think about bringing a tiny baby into the world, we think about that sweet little face, the teeny-tiny clothes, and the warmth and love this precious little being will bring into our lives.

What we don't always think about is the price tag...but perhaps we should. According to TD Canada Trust, a baby's first year of life costs its proud parents around $10,000. When you consider that most women will also have to take some time off work, the whole financial picture can seem pretty overwhelming. So how can you make parenthood work, without going into debt to do it? Here are some tips...

1. Have the talk

If you and your partner plan to expand your family, whether it's this year or a few years down the road, the time to talk about it is now. How will you prepare? Who will earn the money? Who will take parental leave? The sooner you lay out how you both feel about these things, the easier it'll be to come up with a financial plan that works.

"People often go through so much planning around having a child, but then they don't have a plan with respect to how they're going to manage the financial impact," said John Tracy, a senior vice president at TD Canada Trust.

"There's always an opportunity for misunderstanding or different expectations if couples don't communicate. If you talk about it, it'll be easier to work something out," Tracy said.

Once the baby's born, you might not be able to stop worrying about whether it's eating enough, how well it's sleeping, and whether you'll ever get to sleep again! But when it comes to money, a little planning can help prevent at least one more thing from keeping you up at night.

2. Plan ahead...if possible

There are two kinds of parents: Those who plan for a baby and those who get one a little sooner than they expected. If you're in the former group, use it to your advantage by setting financial goals to tackle before you become a parent, such as buying a home, setting up retirement savings and paying down debt.

If you're a surprise parent, it doesn't mean you have to fall off the financial wagon; you still have nine months to get started. Set up the best spur-of-moment plan you can to help reduce the financial impact, and then make a commitment to work toward an increasingly secure financial future.

3. Make saving a habit

If you're thinking about having a baby, you're probably at a stage in your life when there are a lot of demands on your money. But even if your budget is tight and you don't have a lot to devote to savings, Tracy says you must make an effort to save anyway.

"We're big proponents of building a habit of saving, even if it's only a small, nominal amount," Tracy said. "This helps to maintain some momentum in terms of savings goals."

This means that when you're working toward parenthood, it's important to try to save as much as possible to offset the cost of additional expenses and parental leave, even if you can't get the entire amount together. Tracy said it's also important to continue to save during parental leave.

"If you continue saving over the course of the year that you're off work, it'll be easier to pick back up where you left off when you do go back to work," Tracy said.

4. Make sure you know what you're in for

Okay, so now let's talk maternity leave. The reality is that many people are (unpleasantly) surprised by the fact that it doesn't replace your employment income — not even close. And the bigger your income, the greater the discrepancy. That's because while the government offers paid leave for one or both parents through Canada's employment insurance plan, the benefits are equal to just 55 percent of your average weekly wage, up to a maximum of $485 per week. Oh, and that amount, like all employment insurance benefits, is taxable. For many people, that can be a real blow to the pocketbook, so be sure to look into what you're eligible for ahead of time, and make a plan for filling in the shortfall. (One piece of good news: you won't have time to even think about shopping for a while...)

5. Don't leave money on the table

If there's one thing you don't want to do when you're dealing with the financial impact of a new baby, it's leave money on the table. In fact, beyond maternity leave, there are quite a few places to look for additional income and benefits. Tracy recommends sitting down with your employer (or human resources specialist) to find out what parental benefits might be available. According to Statistics Canada, one in five Canadian mothers is eligible for "top-up" payments from her employer, which essentially aim to provide a bit of a boost to what a new mother is collecting from EI. Some of these additional benefits apply to fathers as well, so it's important that both partners do some investigating.

Tracy also recommends looking into government benefits and tax incentives for new families, such as the $100-per-child Universal Child Care Benefit. You can investigate other Canadian programs for children and families at Service Canada.

Start a firm financial legacy

If you can teach yourself the ABCs of budgeting and saving, it'll be much easier to teach them to the little one too. One way to start is to open a savings account, TFSA or RESP when the baby is born, contribute to it on a regular basis, and get your child in on the fun when he or she is a little older. According to Tracy, all banks have children's accounts just for this purpose.

A baby may be small, but it comes with big financial responsibilities that continue to grow along with the child. Fortunately, with some careful planning, budgeting and saving, you can really reduce the dent that cute little bundle will put in your bank account - and that's precious, indeed.

GoldenGirlFinance.ca is a free personal finance and education site for women.

Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.

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