baby savings

The birth of a child is a wonderful thing, but it can also be a wonderful thing for your finances. Keeping in mind that a dollar saved is worth much more than a dollar earned, here are a few of the unexpected lifestyle-related cost savings that we've realized since our son was born over a month ago.

• We're no longer supporting OPEC. Months before my son was born our typical monthly gasoline bill was approximately $250 - $300. Our last two bills were $140, and $40 respectively. We actually went through one full tank of gas in one month.
• Dinner and a movie? How about take out and Rogers On Demand.
• Where should we go on vacation this year? The closest I'll actually get is the Sandals commercials, which I do enjoy....

Funny, these three initial items all have to do with the fact that 'We don't go anywhere'.... I didn't really fully realize this when drafting up the maternity leave budget spreadsheet; go figure.

I have a feeling there will be more to come on this....

small cuts to fixed costs

As mentioned my wife is currently on maternity leave as we are expecting our first child very soon. Here in Ontario, Canada my wife is entitled to 50 weeks of paid employment insurance benefits. The benefit works out to about $369 / week after taxes, as she is entitled to the maximum benefit as per her normal salary which is well over $40,000 annually.

We are already seeing some reduced living (fixed) costs because of our new situation:

• Auto Insurance - We informed our insurance broker of the fact that my wife is now off work, so she will not be commuting her usual 25km each way to work. Due to this change our insurance rate for that particular vehicle was dropped 17%, or $204 per year because the car is now on the policy as not travelling to work each day, which requires many less kilometers of insurance. This reduction in our fixed expenses would be roughly the equivalent of me getting a raise in employment income of about $300 per year before tax.
• Auto Fuel - While my wife was employed, our combined monthly gasoline bill was coming in at about $250 - $300. Now that she is on maternity leave, I am expecting the same bill to come in much closer to $150 per month. This should equate to a savings of about $1,500 after tax dollars per year. For us to bring home the equivalent benefit of this savings in employment income I would probably need a raise of about $2,150 per year before tax.

All told, these two small travel related cost savers are tantamount to me obtaining a raise of $2,450 annually, or $204 / month.

household savings rate...updated

Back in May I posted regarding my household savings rate (HSR), which I defined as savings in the form of investments (reg. and non reg.) divided by net income or gross income. Let's concentrate on net income for now, back then I estimated my HSR to be 34%. At that time commenters, Four Pillars and Mr.Cheap noted that perhaps the principle paid on a mortgage should be considered savings as well, which I believe is a valid point but still does not tell the whole story. What I can't get past is the fact that unless you include interest paid on your mortgage, then someone who invests rather than paying down their mortgage more aggressively will look as if they are saving more money than a friend who pays down their mortgage with the same disposable cash.

On a recently run poll on this blog asking 'What % of your Net Income do you Save?' the following results were obtained:

27% of people save between 10 - 20%
23% between 40 - 50%
17% between 30 - 40%

Several financial sources, including David Bach's books like Smart Couples Finish Rich, claim that you should save at least 10% of your net income to retire well, or in Bach's words 'less than 10% and you are living above your means'. If you could save 20% of your net income you should achieve great wealth or in Bach's words be 'really rich'. From these results it looks as if several readers of my blog (40% of readers) will be really rich in the future. The factor that is difficult to judge here is what people considered 'savings'. Some people probably included mortgage payments, others included principle payments, and others did not, and only included other forms of savings.

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I have recently calculated the following for my family:

HSR = 36%
HSR (including full mortgage payments = 51%

HSR for 2008 when my wife goes on maternity leave = 15%
HSR (including full mortgage payments for 2008) = 37%

If my calculations are correct, and too much unforeseen expenses don't crop up during 2008 then I will be quite pleased to still be able to save 15% of net income with our reduced employment income situation. I am still debating whether my wife will continue to contribute to an RRSP for the year at her usual rate, decrease her contributions, or hold off for 2008 all together. It is although starting to look like our income trust security blanket that we have built up may not get used, which is wonderful as I'd be quite please to roll this over into an RESP for my first child, or keep it invested and start a synthetic drip for a future child's RESP or other uses.

limit order for Inter Pipeline

I put in a Limit Order today to add to my position and buy more Inter Pipeline Fund (IPL.UN) at $8.80. It is currently trading at around $9.00. The order expires on October 15, 2007.

If the 'buy' goes through at $8.80 then I would have purchased this portion at a yield of 9.55%. This will complete my Income Trust portion of my portfolio which I have previously described as part of our 'maternity leave' financial strategy.

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.

Adjustments
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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