Question from The Globe’s GenYmoney Facebook group: For other young families living in downtown Toronto, what are your tips and tricks for managing the cost of daycare? Our LO (little one) starts daycare in the spring and we’re reviewing our budget:, it’ll be tight. Just wondering how others manage.
Ms. Simmons works with young people to help them navigate the new economic climate with personal finance, ethical investing and small business advice.
Shannon Lee Simmons is a financial planner and founder of The New School of Finance in Toronto.
The answer: Fasten your seat belts, parents – the daycare years are upon you.
You are not alone. One of the biggest budgeting conundrums many families with small kids face is paying for daycare. It’s typically a large amount of the household income and it lasts for a handful of years. A 2016 Canadian Centre for Policy Alternatives report found that infant care – that’s for children aged one-and-a-half years and younger – costs Toronto parents about $19,788 a year. That’s roughly $1,650 a month. Yikes.
Large amounts like this suck up all of the savings potential for most of the families that I work with, and push their budget to the limit. Sounds like this may be happening to you. It’s okay. Just breathe. It’s not forever. Your most important job is to try to stay afloat and, above all, avoid going into debt during the daycare years. Here are some tips to help you survive.
Tip 1: Ensure you’ve applied for all subsidies
There are subsidies out there and tax credits to help families in Canada.
They vary widely from province to province and amounts depend on many factors such as a family’s pooled net income, expenses and number of children.
One example is the Canada Child Benefit (CCB). This is a tax-free monthly payment that is made to eligible families with children under the age of eighteen. Use this calculator on the government site to estimate what benefit you may qualify for.
Another example is the Child Care Fee Subsidy in Toronto. This subsidy aims to help eligible families offset the cost of a licensed daycare for children up to the age of 12.
Do your research. Ensure that you have applied for any subsidies or benefits you think you may be eligible and do your taxes on time. You will need up-to-date tax information to apply for subsidies and benefits.
Tip 2: Ensure you get a receipt for your care
If your little one is enrolled in a daycare that qualifies as eligible daycare, get a receipt. These could include expenses such as caregiver services, daycare centres, educational institutions (for the part that relates to child-care services) or day camps.
In general, you can deduct $8,000 annually for each child under age six and up to $5,000 for each child ages seven to 15 from the spouse with the lowest income. This works like an RRSP deduction and can result in thousands back in tax refunds at tax time. For example, if you are the parent who qualifies to use the deduction and you earn $50,000 a year, an $8,000 child-care deduction would result in a refund of approximately $2,100. You can use that to offset the cost of daycare for the upcoming year.
For more information on the deduction and eligible expenses, check out this link.
Tip 3: Use a separate bank account for daycare
Depending on what subsidies or benefits you qualify for, there may be money coming in from different benefits such as the Canada Child Benefit, the GST/HST credit or the Ontario Trillium Benefit if you live in Ontario. Some may come in monthly while others may come in annually. By setting up a separate bank account for daycare, you can stash all benefit money when it comes in plus any windfalls such as your tax refund. Then, each month, you only have to fund the rest of the expense from your budget.
Let’s say that your annual daycare is $15,600, or $1,300 a month. If your household received $1,200 a year in government benefits and you received approximately $2,000 in a tax refund from the previous year, then you only have to pay for the difference, $12,400 ($15,600 – $1200 – $2000) for the next year. This is only $1033.33 a month, which is $266.67 less each month than the $1,300 that is required. Try to get a bank account for free if you’re able to save on fees.
Tip 4: Keep calm and save on (past the daycare years that is)
The daycare years require a lot of deep breathing and perspective. Say it with me now: It is not forever. It is not forever. It is not forever.
As I mentioned, your job is to stay afloat and not go into debt. If you can come out on the other end with no debt, you’ve won the game. It’s okay that you take a break from other savings goals during these intense spending years to avoid plunging into debt. But once the daycare years are over, you can take the money that used to be allocated to your daycare bill and put it back towards your savings goals.
For example, if you’ve been putting aside $1,600 a month for daycare and the cost drops to $1,000 as your little one gets older, immediately start putting the $600 a month toward other savings goals such as paying off student debt, a mortgage, or saving for retirement. Once the daycare years are totally done, you’ll have $1,600 a month of savings potential that you can sock away to make up for the lost savings during daycare years.
I know that when you crunch the numbers, it may seem so daunting you lose hope in your financial plan. But it’s not forever. Take advantage of any free money you can get and start saving again once the daycare costs begin to reduce. You’ll catch up, I promise.