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Balance your savings and investments while raising a family

There has been a lot of talks recently about the financial state of 30-somethings. Apparently the future does not look very bright for those of us caught at the tail end of Generation X and the beginning of Generation Y.
The number of financial responsibilities facing this age group can seem daunting. Raising a family is expensive enough without having to worry about setting up an emergency fund, paying down the mortgage, putting away money for retirement, saving for your child’s education, and everything else that comes along with improving your financial situation.

So how do you balance your savings and investments with the everyday costs of raising a growing family? You can start by setting up a simple plan for each of these categories to ensure that you are on the right financial path.

Streamline your mortgage

Many 30-somethings entered the housing market during the peak of the housing boom with long amortization periods and little-to-no down payments. Luckily there are two quick fixes you can make to your mortgage immediately to pay off your balance faster and save on interest.
The first is to switch your payments from monthly to bi-weekly. On a $300,000 mortgage at 5% interest amortized over 30 years, switching to bi-weekly payments would only cost you $133 more each month and would save thousands of dollars and over 5 years off the life of the mortgage.
The second way to help streamline your mortgage for the future is to switch to a variable interest rate but maintain your payments at the fixed interest rate. Using this technique while interest rates remain low will further reduce the principal on your mortgage while still giving you a cushion for when interest rates start to rise again.

Utilize your TFSA for short term savings

The Tax-Free Savings Account allows you to contribute up to $5,000 per year and withdraw that money anytime without paying any taxes on your gains. This is a perfect savings vehicle for someone in their 30’s who has many short term savings goals.
As a couple, make it a priority to contribute and fully fund at least one of your TFSA accounts each year. Create a list of short term goals that need to be looked after in the next 1 – 3 years and use this money to pay for these items in cash.
Your list might include anything from buying a new car to doing some minor renovations or repairs in the house, taking a family vacation, or upgrading your furniture. You don’t want to go into debt for something you could have easily planned for a year or two in advance.

Contributing to an RESP

An RESP (Registered Education Savings Plan) is a great way to start saving for your child’s education. The mistake a lot of 30-somethings make is to try and maximize their RESP contributions before they even have their own finances under control.
After your child is born, make sure you get the account open and take advantage of the initial grant money, but then just contribute what you can afford in the beginning. If you are eligible for the Child Tax Benefit you can start an RESP with the Canada Learning Bond of $500 to begin with and contribute $100 a year until your child turns 15 years of age, without even putting a penny of your own money towards it.
Once you are comfortable increasing contributions to your child’s RESP you can maximize the account by contributing $2,500 per year, which will get you the maximum annual CESG of $500 in free money from the government.

Saving for retirement

Retirement savings is the most common thing put on hold by most 30-somethings until they have a firm grip on everything else that comes with raising a family. There is still plenty of time to focus on saving for retirement once the rest of your finances are in order.
Setting up an RRSP is simple and with a low-cost index fund like TD E-Series you can contribute as little as $25 per month towards your retirement account. Again start small with what you can afford and then slowly increase the amount until you are contributing about 10% of your income.
One thing to take full advantage of is an employer matching program. Some employers will match your RRSP contribution dollar-for-dollar up to a certain percentage of your salary. Calculate that amount and make sure you are contributing at least that much in order to receive the full amount from your employer. You can’t beat 100% returns on your investment.

Light at the end of the tunnel

There are so many financial pressures facing 30-somethings today that it’s no wonder the so-called experts doubt what the future holds for this generation. We can’t possibly maximize every savings vehicle and make extra mortgage payments without sacrificing the joy of creating memorable experiences and spending quality time with our families.
The key is to strike a balance in your 30’s where each aspect of your finances can be set-up for continuous improvement, all while taking care of everything that comes with raising a young family. It’s not an easy task, but if done properly you can help dispel the rumors of our doomed financial future.

Comments

  1. Sustainable PF

    Thanks Robb! As we’re starting a family in the fall these tips will help a lot.

    How do you feel about Student Debt, which many Canadians still have into their 30s? I find this one hard to assess as there is a tax break on the interest but the rates are usually much higher than those of a mortgage (prime + x.x%)

    • Echo

      @SPF
      I’m not a huge believer in rushing to pay off student loans as quickly as possible. As you mention, there is a tax break to consider. The interest rates are higher than a mortgage, but not by much in most cases.

      My wife still has about $5k left on her student loan and we pay about $150/month to cover it. I look at the opportunity cost of putting $5k on the loan right now vs. only saving $150/month in our budget.

      And because we balance so many other things in our budget it doesn’t make sense for us to increase our monthly payments at this time.

      Congrats on the pending arrival, these will be exciting times for you!

  2. Jessica07

    These are really great tips. 🙂

    • Robb Engen

      Thanks Jessica!

  3. Doable Finance

    Investing in tax-deferred account may turn out to be the best option after all even if individuals don’t save much outside their retirement account.

  4. Bret @Hope to Prosper

    I hate to tell you this, but it wasn’t any easier to raise a family for us Baby Boomers. Some things have changed, but many of the financial challenges are the same.

    I think this is all great advice, except for converting your mortgage to a variable rate. Interest rates are historically low and more likely to go up in the future. Now is a good time to lock in a fixed rate, because inflation is on the rise.

    Also, instead of converting your mortgage to pay every two weeks, you can just choose to pay a little extra each month. This makes a huge dfference, especially at the beginning of the loan.

    • Echo

      Hi Bret, thanks for your comments. I’m sure it wasn’t any easier to raise a family for 30 year-old’s in any generation, but I thought I would focus on this particular generation due to the recent media attention proclaiming todays 30 year-old’s to be “screwed”.

      As for the interest rate debate, given that the variable rate has beaten the fixed rate close to 90% of the time, I’ll side with history on this one.

      The Bank of Canada is in a tough position. Yes, they have to battle rising inflation, but if they raise the rates too much and too fast they risk our loonie climbing even higher against the $USD, which will cripple our manufacturing industry.

      I think they will opt for slower increases over a longer period of time. In the meantime, a variable rate at prime minus .75 will save you money.

  5. Brad Mol

    This article has a few great ideas. I think there are a couple key underlying themes here. The first is that individuals (of any life stage) need to know what they spend. Setting up a budget of both mandatory and discretionary expenses will help determine what amount of cash flow is available. The second is developing a strategy to most efficiently use that surplus towards your personal goals.

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