Saving Money for New Parents

It is not uncommon to hear the phrases “new parent” and “very poor” in the same sentence. In the “traditional” pattern, baby #1 comes along at a time when mom and dad have just finished school, gotten married, bought their first house, and bought a car. The college days of partying all night are in the rear-view mirror.

It’s no secret that times are tough. If you’re both lucky enough to still have a decent paying job, your paycheque is being massacred by childcare costs. If you don’t have a strong stream of income you may be finding yourself dipping into credit just to make it to the next month.

This article is about ways for new parents (and anyone, really) to improve their financial situation.

Switch to Cash
Even kids walk around with debit cards today. Many people are so accustomed to thinking of money in terms of a bank balance sheet that the concept of cold, hard cash is becoming foreign. Since we aren’t constantly reminded of how much we have in our accounts, it is easy to swipe the stripe and forget about it until the end of the month.

Instead, figure out how much money you plan to spend in a pay period and withdraw that amount when you get paid, then put away the debit and charge cards. Without any effort you will find yourself spending less because you will be subconsciously aware of how much money remains in your wallet. When you run out of cash that’s it – you can’t buy anything else; the rest of your money remaining in your account gets shielded from impulse purchases.

Establish Limits – Spend Within It
We saw this trick on Till Debt do us Part some years back and it has become a staple in our household. Get a glass mason jar and label it for each of your recurring expenses – gas, food, children’s arena fees. If you know you will spend $200 on gas for a pay period, withdraw the cash for that and put it in the jar – ditto for the other expenses. As you need to spend money on gas or food, take the money you need from the jar.

This works similarly to the above tip with one key difference – instead of carrying around all your cash for the pay period which leaves you prone to over-spending or being robbed, you will find yourself spending only what you need. At the end of the pay period take the left-over cash and put it into savings or treat yourself to dinner. You will be surprised at how rich you really are. I actually found myself reducing my budgets because the amount I was spending became more realistic, all the extras were trimmed away.

Pay the Government
If you owe any money at all to the government pay it now, even if you have to go into debt to do so. Failure to pay taxes can result in fines of up to 100% the originally owed amount. Governments are tightening their belts just like everyone else now and will come down on you hard if you’ve made any mistakes. If you continue to dally after fines have been levied you can be looking at criminal convictions. Let your credit cards slide if you must, but pay the government first.

It isn’t uncommon for people to innocently forget to report small bits of income, but it is against the law, and it is being scrutinized more than ever. If you do your taxes yourself, consider hiring a professional to do it for you. The expense is negligible (compared to making a mistake) and if you are due for a refund many companies will issue it to you on the spot and collect it from the government on your behalf.

Claim all Tax Benefits
I suggested using a professional tax preparer (like H&R block, which conveniently places booths in Wal-Marts nationally) in order to help avoid making costly mistakes on tax returns. The other major benefit to using a professional is these people are often aware of government programs available to you that automated software may not identify in your situation. They are better suited to know which options go together best to maximize your refund and sometimes which programs to enroll in (like the GST/HST rebate) that will result in money deposited to your account throughout the year. Use a professional tax preparer.

Cut Credit Cards
Credit card debt is the most expensive debt you can hold. If you carry a balance on your credit card cut it up now. Even if you fall back on it to buy groceries or other necessities, cut it up. Circumstance is the mother of invention and I guarantee you will find a way especially in the first weeks to pinch enough money to break the cycle of credit card use. Many people do not have the willpower to pay off their cards while using them; credit issuers know this is human nature and exploit it for big profit. Deny them this profit at your expense by cutting up your cards and watching your balance head toward $0.

Snowball Debt
I read about the concept of “snowballing” credit card debt some years ago and found it to work marvelously. Financial articles generally recommend you first pay down your debt having the highest interest rate first – paying down $100 of a 20% card saves you $20 in the first year vs. $6 savings if you pay down $100 on a line of credit with a 6% interest rate. However the 6% line of credit may have a much smaller balance than the credit card. If you pay the credit card and make the minimum payment on the line of credit, you won’t see progress very quickly and will become discouraged (see: human nature). When disaster strikes you need to get at your money fast, you will pull from the credit card and be back at square one.

To snowball your debt, make the minimum monthly payments and put all the extra money available to you onto the debt with the lowest balance. That may mean paying a debt with a 6% interest rate before one with a 20% rate; but, it will disappear fast with the extra money. When that happens, you will have one less account to service, meaning one less minimum payment to make. That minimum payment now goes toward extra money that can be thrown at the debt with the next lowest balance.

The effect is similar to a snowball rolling down a hill. As debts are erased you will have more money to pay down bigger debts even faster. You will see progress which will make the effort more worthwhile. When disaster strikes you will find yourself with a better credit rating that will enable you to secure loans at more favorable rates to help you through hard times.

Relax, Have Fun, Work for a Better Future
All the time we hear the phrase “you can’t take it with you when you go” used to justify making purchases on credit. Pay it back later, they say. Enjoy life now, they say. Then “they” get rich off the interest you have to work overtime to pay off. I think the meaning of the phrase today has more to do with the family and loved ones you leave behind when you go to work. Think about this before you give into the urge to take out your credit card and buy the next gizmo you find at Best Buy: Will this item improve my life? How many hours of work will it take me to pay for this, and for the interest it will accrue? If this is a gift for someone, will they value it more than the time I could have spent with them if I didn’t have to work as much.

Our neighbours always seem to have money to do what they want to do. They go to restaurants, they go crazy for their grandchildren at Christmas, they think nothing of going on an overnight trip and staying at a hotel. But they do it all with no debt – they have never owned a credit card. They own their own house – it isn’t a huge house, but it is the right size for them and everything they have. Their secret is they don’t buy things they can’t afford. If they don’t have the money for something, they just do without. That is an old-fashioned way of living that we can all learn from – and many of us will, because as times get harder the idea of living within one’s means is going to make a comeback in the coming years.

Related posts:

1. Never too Early to Teach Children About Money
2. Parents of Newborns: Take Care Of Yourself First
3. Need, Desire and Cash