I was recently invited as a guest on a podcast (parent talk, launching 2018) as well as a speaking engagement to a group of new moms. Both experiences were so fulfilling mainly because I know how difficult it is as a family to decide how to best allocate your disposable income. We are faced with so many financial decisions; should I contribute to my retirement plan, pay down my debt, save for my children’s education, buy a nicer car or bigger TV or take the family on vacation? Whether or not we have the means, we are continuously pressured to focus our attention and disposable income on meeting these kinds of needs and wants. Hence, it was fulfilling to have the discussions and provide a bit of guidance as to what to do.
I strongly feel that now more then ever it is vital that you help your children with their education savings, it will set them up for financial success in the future. The staggering costs with tuition fees and housing will make it very difficult for our children to manage debt and complete their education. The rise in tuition fee cost is outpacing inflation, a 4year university program today costs in the range of $60,000 and for a child born today could go up to $120,000.
To be effective with your planning, I suggest that you plan with the “end” in mind. Knowing exactly what your child’s education cost will be, tuition, housing… the same applies for when planning your retirement; what are your sources of income, what will your expenses be, what lifestyle do you want? Plan with the end in mind so that you are working towards a tangible goal.
So, for our children’s education there are 5 different ways you can save. The most popular and widely used plan is the Registered Education Savings Plan (RESP). A RESP is designed so that any growth within the plan is tax deferred, meaning you do not pay taxes on that growth. The bonus is that the government will give you FREE money for contributing into the plan which is referred to as the Canadian Education Savings Plan. The Canada Education Savings Plan (CESG) is a basic grant which is 20% on the dollar to a maximum of $500/year. Now, there are additional grants you can qualify for which are income tested such as, Canada Learning Bond (CLB) and the enhanced basic grant (ECESG). Take advantage of a RESP , by doing so you can potentially get up to a lifetime maximum of $7,200 in basic grant funds per child not accounting for the additional grants you may qualify for. Setting a plan for your kids is essential for their future financial success. When setting up a plan ensure that the plan is setup as a family plan not a single plan. A family plan allows you to add additional children who potentially can benefit from the savings if one of the children does not attend school.
Do not lose the fact that RESP’s are structured specifically to fund an education and your child would have to be enrolled in a qualified institution to access the funds. What if your child does not want to go to school? Do not panic…. you can keep the plan open until the age of 35 however grant money will only be paid up to the age of 17. Also, know that if one child doesn’t go to school yet another child does, potentially this child can benefit from the funds.
RESP’s are not the it all be all. There are different ways of saving for your children: you can save through a Non-registered savings plan, a Tax-Free Savings Account (TFSA), a Life insurance policy and or through your corporations. Each of these vehicles can be an effective way to save for their future purchases, helping with their first car purchase and first home or topping up their education especially if they decide to go to medical school.
At the end of the day, what ever you do, instill in your children the value of money and hard work. Teach them work ethics, how to manage money and that cash is king!!
Have the conversation as early as you can and start saving as early as you can, the power of compounding returns is unbeatable.