Wednesday, August 8, 2007

maternity leave financial strategy

As mentioned previously my wife will be embarking on a year long hiatus from the working world when we add a new member to our family in January, 2008. To prepare financially for this drastic reduction in our employment income we have developed a strategy which involved saving, investing and some other adjustments. My wife actually earns a higher income than I do, so our situation may involve more of a drastic change than most.

My wife will halt her RRSP contributions.

We will have our car insurance reduced on her car, as she is going from driving 80 km three times per week (she works from home as well), to no commute.

Our grocery and dining out bills should be reduced as she will have more time to cook so we will purchase less convenience foods and dine out less. Dining out with a newborn does not strike my fancy either.

Our gasoline expenditures should essentially be cut in half.

I have run the numbers into our budget and I believe we will be able to get by on our adjusted income with money to spare each month, albeit much less money to spare than now. The second part below is more of a security blanket or fire escape if you will....

Savings / Investment / Security
The main part of our strategy involves something I started doing months ago, buying Income Trusts. By January 1, 2008 I will have a large part of our non registered portfolio (about 25%) invested in these income producing vehicles. Inter Pipeline Fund and Yellow Pages Income Fund are the two that I hold now. I may continue to add to these two, or I may buy another trust.

This store of income producing capital could accomplish the following:

- Provide upwards of 8% cash back to us in the form of cash distributions to be used for our living costs if required, or for re-investment. I am selecting trusts which I believe have very stable distributions, so I am counting on these distributions not being cut and continuing through the entire period that we hold them.

- Maintain a certain amount of capital stability in case, due to unexpected expenditures, we require the funds during the mat. leave.

- Grow in value or decrease in value.

The real bonus to this strategy in my mind lies in the future. Assuming we do not require this capital over the year mat. leave period and just use the distributed cash, then the real bonus becomes evident. These trusts should grow and continue to spit money out at us into the future. At some point in the future when we decide to have our second child the money is there for us already, so we don't have to do a thing. We will be prepared and will not have to worry or cut back our regular saving and expenditure habits. Also, during this time the chances are that the funds may have grown over time which will allow us to use part of the capital for other reasons or just re-invest the excess. Another possible use for some of the unused or excess capital at the end of the maternity leave would be to start an RESP.

Risks to this strategy include the loss of capital at a time when we do indeed require the funds. Also, even though I have done my homework here the trusts may cut their distributions and we would be left with less monthly money as well as likely less capital when sold.

The important thing is to understand the risks and try to make the best decision. I believe the odds are on my side that this strategy has very little downside and much going for it.

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FourPillars said...

Sounds like a great strategy to me.

Your idea about changing the auto insurance to reflect the fact that your wife is not commuting is excellent. I'll bet most people don't think of that one.

One drawback I can see with the income trust strategy is taxation. Once your wife is back at work then the income earned by the trusts will be taxed at a high rate which might not be the most efficient way to do it. On the other hand they provide needed income so maybe the taxes are a secondary issue. Come to think of it, some of the dividends will be ROC so maybe my point isn't all that valid?


telly said...

I think the income trust plan is a good one. Are they held in your or your wife's name?

Does your wife know about the plans for her to have more time to cook with a newborn? ;)

uno1taxpayer said...

Your maternity leave financial strategy is well thought out. If you choose your income trusts with care like I feel/know you will, you will never look back. Their monthly income stream as one famous politician told a crowd of us old timers one cold pre-election afternoon "provide regular payments that are used by many to cover the costs of groceries, heating bills and medicine."

moneygardener said...

The trusts will be held under my name so the tax treatment should not change over time. I will have to pay tax on the distributions, expecially the income getting around it.

See above.

She laughed when she read your comment. She would agree that she will have more time to cook, easier said than done I guess though...

Thanks for your comments.