Life can be filled with twists and turns that can be exciting and worrying. As credit counsellors, we often help people who are going through a big life transition and are struggling with the financial impacts of them.
From childhood to adulthood, being single to being married, going through a divorce, becoming a parent, getting a new job or losing your current job, entering retirement, moving, dealing with the death of a loved one, buying your first house—the list goes on and on.
If you’re going through one of these life transitions or are preparing for a change, this blog has information that you might find valuable.
In a recent Moolala: Money Made Simple podcast episode, Credit Canada CEO Bruce Sellery spoke to Kurt Rosentreter, CPA and financial advisor with Manulife Securities, Inc., about the financial impacts of parenthood and saving for a new baby.
In the podcast, Kurt reviews some of the considerations that prospective parents should make before they have kids. Many of the financial management tips that he outlines for preparing for your first child can also be applied to other life events and transitions.
What are the financial impacts of different major life transitions? How can you prepare for these new stages in your life? Let’s talk about some of the different kinds of life events and how they can influence your finances.
What Are the Potential Financial Impacts of a Life Transition?
Different kinds of life events will have different impacts on your finances. Similarly, they may require different kinds of preparations in your personal money management plans.
Some examples of the potential financial impacts of different life transitions include:
Life Transition #1: Getting Married (or Entering a Common-Law Partnership)
Entering a marriage or a common-law partnership is a significant event in anyone’s life. Whether you have a big ceremony in a church with over a hundred friends and family members, a small, private ceremony with only your closest loved ones attending, or a civil ceremony with a justice and a handful of witnesses, it’s a major change in your life—both on a personal and a financial level.
Some of the potential financial changes that this life event can bring include:
- Potential Tax Benefits. After getting married or becoming common-law partners, you may be able to qualify for shared benefits that can reduce your federal tax burden. For example, if your spouse has certain non-refundable tax credits and has already reduced their tax liability to $0, they could transfer them to you to help reduce your tax liability.
- Pooled Resources and Costs. When you’re married or in a common-law partnership, you can pool your resources with those of your spouse and use them to pay for shared costs like housing, food, utilities, and more. This can help increase the resources you have available for other costs.
- Major Wedding Debt. If you have a big wedding in a church with all of the accoutrements, it can get expensive. Some estimates put the average cost of a wedding in Canada between $22,000 and $30,000. This can put a major financial burden on a new couple—which is one reason why some couples choose to hold a small civil ceremony instead of the more traditional (and expensive) church wedding.
Life Transition #2: Becoming a Parent
Another major life event that has a long-lasting impact on your finances is becoming a parent. This was the specific transition that Kurt Rosentreter talked about in the Moolala podcast, and one he talks with his clients about frequently. Some of the financial impacts of becoming a parent include:
- Increased Expenses. Becoming a parent means assuming new financial responsibilities as you try your best to provide the best environment for your child. From diapers to food, education, health, entertainment, and more, parenthood can quickly become expensive. In the podcast, Kurt highlighted that, over thirty years, he saw a “million-dollar” difference in the financial performance of people with similar means where one had children and the other didn’t.
- Tax Incentives. To help offset the expenses of becoming a parent, there are a few tax benefits that you can apply for. The Government of Canada has a web page featuring a list of some child tax benefits and advice for applying to receive them.
Life Transition #3: Unemployment
Unemployment is one kind of change that can be difficult to deal with—especially when it overlaps with other major life events! Navigating life after unemployment can be complicated. Managing your finances wisely while job hunting can help you get back on your feet quickly following job loss. Also, it can help to seek some guidance to learn how to budget more effectively, save money, and make smarter financial decisions that protect you from the impacts of unemployment.
The biggest effect of unemployment on your finances is that you’re losing your primary source of income. In addition to rethinking your budget and expenses, there are financial resources that can help bridge the gap—such as unemployment insurance benefits. Employment Insurance (EI) helps those who lose their jobs through no fault of their own so they can cover some of their expenses while they try to get a new job.
Life Transition #4: Buying a Home
Buying a home is a major life milestone for many Canadians. Transitioning from living in rented housing or with other family members to having your own house brings many new expenses and can be a lot of work as you’ll have new responsibilities.
It can be difficult to generalize about the financial impact of buying a home since there are a lot of variables to consider like the value of the home, which province it’s in, what kind of mortgage you get, your credit score at the time of the purchase (since it can affect the mortgage the lender offers), and more.
In any case, our recommendations are:
- Get Your Budget in Order: Create a monthly budget that tracks your current income and expenses. It’s a good idea to look at your current housing expenses to see how much home you can comfortably afford.
- Do Your Research: Investigate the different kinds of mortgages and shop around for rates. Learn what housing prices are for the area where you’re buying your home, if there are any options that are more affordable close to your desired neighborhood, amenities for different homes, what your expected taxes will be in addition to the mortgage, home closing costs, and any other info you can find. Here, it can help to talk to different real estate agents, mortgage brokers, or to your financial planner/advisor for information and advice.
- Don’t Buy Too Much Home: When shopping for a home, it’s important to avoid spending so much on it that it becomes a drag on your finances. By checking your current income and expenses and looking at what the monthly cost for a mortgage would be, you can find out how much mortgage you can afford. Also, remember that you don’t have to take the maximum mortgage the bank offers. Taking a smaller loan for a less costly home helps you reduce the amount you spend on interest in the long run.
Life Transition #5: Divorce
Did you know that in 2020, for every 1,000 marriages, 256 of them ended in divorce within thirty years and the mean duration of the marriage was about 15.3 years? (Source: Statistics Canada).
While it is unfortunate, not all marriages last for the life of both partners. Divorces can be a life-changing event—creating a lot of financial uncertainty and expenses. For example, a divorce could cost tens of thousands of dollars depending on factors like court costs, lawyers’ fees, and impacts on time spent away from work preparing for a legal battle if the separation is not particularly amicable.
One of the challenges of navigating your life after a divorce is dealing with debts accumulated during the marriage. Considering that financial issues are a leading cause of divorce, it’s important to be prepared for post-divorce debt. Some of the preparations you could make include:
- Checking Your Credit Report. Both you and your spouse should check your credit reports and other documents for items like credit cards, mortgages, auto loans, and other financial services in your or your spouse’s name. This gives you an opportunity to identify any accounts you aren’t aware of—especially ones in your name.
- Addressing Joint Accounts with Your Spouse. When both you and your spouse are named on an account, you’re both equally responsible for any balances on that account regardless of what your separation agreement says. It’s recommended that you close these accounts prior to dissolving your marriage or common-law relationship.
- Revise Your Will, Investment Beneficiary, and Power of Attorney Documents. Following a divorce, you may want to revise your will and revoke a spouse’s power of attorney (if they have one) to make financial and legal decisions on your behalf. It can also help to review the beneficiary information for your investment accounts (like pension plans, TFSAs, RRSPs, and RRIFs) and your life insurance policy.
- Keep Up with Debt Payments on Shared Debts. While it can feel frustrating to keep making payments on debts you don’t feel are yours, it’s important to keep up with your minimum payments on shared debts throughout your divorce. This can help keep these debts from growing.
Life Transition #6: Death of a Loved One
Death is not a comfortable topic to talk about or plan around—especially when we’re considering the possibility and effects of the death of someone whom we love dearly. The death of a loved one can have several impacts on our lives emotionally and financially.
Some of the financial impacts of a loved one passing include:
- Dealing with Funeral Costs. Holding a memorial for the departed can be expensive depending on the type of service being held. For example, the average cost of a burial in Canada ranges between $5,000 and $10,000 while cremations range from $2,000 to $5,000 on average.
- Managing an Inheritance. When a loved one passes and leaves a part of their estate or assets to you, that can complicate your financial management for a while as you incorporate the new assets. To help your own loved ones in case of your passing, it’s important to create a will that has details like who should take care of your children, how your bank accounts will be handled (it can help to ensure that your joint accounts are set up as “Joint with Right of Survivorship” so they can easily transfer to the surviving partner), and how other assets are to be distributed.
- Handling the Loved One’s Debts. In most cases, debts cannot be inherited after someone’s death unless the other person agreed to take responsibility for the debt. But, if you were a co-signer on a loan or part of a joint account and the person you co-signed with passes, then you would be responsible for repaying the debt. More typically, the debt collectors will recover the money owed from the estate of the deceased before it is passed on to their inheritors.
How to Overcome the Financial Impacts of Major Life Events
The situations above are just a few examples of life events that can have an impact on your finances. But, what can you do to deal with these impacts?
Preparation Is Key for Minimizing the Financial Impacts of Life Events
When discussing how to deal with the financial impacts of a life-changing transition like having kids, Kurt Rosentreter started by emphasizing the importance of preparation. He recommended three basic steps before you start the journey of parenthood:
- Checking into Life Insurance. If something happens to you, how will your surviving loved ones manage the loss of your support? Life insurance is one way that you can protect your loved ones by providing them with resources to help them cover their living costs when you’re gone.
- Setting Up a Will. Who do you want to pass your home and other assets to? Writing a will can help you ensure that the people you most want to see taken care of, or who will provide the best stewardship of your estate, are the ones to gain control of your assets.
- Creating a Timeline of the Costs of Having a Child. How much does raising a kid cost? Between education, housing, food (including unplanned late-night fridge raids by a rapidly-growing child), clubs/sports activities, and other costs, the price tag of a child can be massive. Having a child can even potentially have an impact on earnings as you and your spouse dedicate time towards child care.
While these preparations are specific to becoming a parent, the general rule of preparing holds true for all kinds of life transitions. And, your preparations can help not just you, but those you care about most.
For example, say your spouse has a life insurance policy and they pass. With that life insurance policy in place, you’re able to take care of their debts, pay for funeral costs, and even set aside some money for your child’s continuing education despite losing the support of your partner.
Similarly, saving some money in a “rainy day” fund can help you cover emergencies like the loss of a job while you look for new employment or needing to replace a vehicle after an accident.
Avoid Excess Debt
Having large debts can make transitioning from one phase of your life to another more difficult. For example, it can be hard to focus on searching for a new job when creditors are after you for the money owed. Getting a good mortgage rate on a new house may be more challenging if your credit cards are maxed out and your utilization rate is too high.
So, as a good rule of thumb, it’s important to avoid accruing excess debt when possible—and to pay down your highest-interest debts as much as you can afford. Ideally, you would want to hold no more credit card debt than you could comfortably pay off with one or two paycheques.
With less debt, you’ll have an easier time setting aside money in your savings and investment accounts to use towards financing your life transitions later.
Make a Budget for Your Expenses and Update It Following a Major Life Event
Crafting a budget using tools like our budget planner and expense tracker is pretty basic advice for managing your finances, but can still prove to be the most valuable advice to follow. With a good grasp of what your income is and what you’re spending it on, you can find ways to cut costs so you accumulate less debt and have more money to save or invest.
However, whenever you go through a major transition in your life, whether that’s getting a new job, becoming a parent, getting married or divorced, or retiring, it’s important to revise your budget since these transitions can affect your expenses.
So, if you undergo a major life change, take a few months to track how your spending habits or needs change following the change, and use that information to update your personal budget. This helps you adjust your spending sooner rather than later so you can keep out of debt.
Get More Help and Advice from Credit Canada
Are you preparing for a major change in your life and need help and advice for dealing with it? Check out our other blogs for a variety of articles on personal finance topics like debt management, creating a budget, and more.
If you’re in debt and need help right away, contact Credit Canada today! Our non-profit credit counselling services have helped thousands of Canadians get (and stay) out of debt—and we want to help you, too.