Benefits of Living On Less
Now that baby is near, I was thinking about my wife's planned 52 weeks of maternity leave.
In Canada, mothers can take as much as 52 weeks off for maternity and parental leave. Of those 52 week, 50 weeks are paid.
However, there is a maximum amount. You get 55% up to a maximum of $50,800 a year. This means a weekly income of approximately $537. Or around $26,850 for the year.
But wait! You might say...
$537 a week is $27,924 a year!
Well, remember the part where I said you only get paid for 50 weeks? Yeah...
So if you earn less than $50,800 a year, essentially, you'll be getting around 55% of your income. Not that much of a drop. However, for those earning over $50,800 a year, that can be a huge gap in income. Make $65,000 a year? You get $537 a week. Make $150,000 a year? You get $537 a week.
No wonder a lot of new parents go back to work or forego leave altogether*!
Fortunately, we do have a few things going for us.
The first is that we're only spending 55% of what we take home. Or putting it in another way, we currently have a 45% savings rate.
If we were forced to live on my salary and wifey's minimum income during her leave, we'd end up with a 7.5% savings rate. This is assuming a tax rate of 25% for wifey's maternity pay.**
That's not bad. We'd still be able to put some money aside for the year. My estimates also don't consider distributions or interest from the bank. I'm assuming our income is coming only from EI and my salary.
However, if we were to have a savings rate of 0% (we spend every penny we earn), then we'd be in a difficult position when the baby comes and wifey goes on leave.
How would we be able to finance our his and her Mercedes-Benz? How would we be able to buy the $1,000 iPhone 7? How would we be able to afford the $150 a month premium cable package that's sold to us by our very generous (not!) cable company? How would we be able to go out every night to have dinner? I guess we'd have to put it on the credit card or borrow from the line of credit!
Even thinking up pretend scenarios like these makes my head hurt.
Of course, wifey and I are in the enviable position where her company offers her a top up. That's where a company pays for the difference between what EI is giving you and what you normally would be getting from a regular paycheque. That's the main reason she's taking the year off, because... why not?
It's important to note that hers isn't a 100% top up. However, it's better than most companies out there that offer no such incentive.
However, by living on less, you can also insulate yourself from unexpected job loss or an unexpected emergency expense. It's not just in preparation for when little one appears.
Now we just need to tell our little girl that we're living on less.
*We went to a pre-natal breastfeeding class a couple weeks back. One of the expectant mothers wasn't planning on taking time off.
**Of course, since Canada has tax brackets, we don't pay the same rate of tax for all our income. I'm just assuming an average of 25%.