Friday, January 16, 2009

Saving For Their Education

Most people want their children to have a better life than they did. This is a fundamental belief of most parents and Canadians are no different than the rest of the world. Yet too often we forget to teach our children the right lessons and RESP's are an important tool.

A couple years ago I coined a phrase (which I should probably trademark) that when we do not save for a child's education, we are teaching them how to "deficit finance" at an early age. I am not suggesting that parents need to pay for everything for their children, as self sufficiency is an important trait. Yet it constantly amazes me how many people remain "ignorant" of the future costs of education and how to best utilize an RESP to help offset some or all of those costs.

The Canadian government deserves kudos for realizing the importance of an education, and the use of RESP's can benefit all Canadians. Most people understand the basics of RESP's but may not know some of the other important differences. Here is something that may help you get through to the end of this entry.

This link from Canadian Business shows how much it will cost for little Johnny or Susie to attend a post secondary program in Canada. You say your child will be the next Clayton Ruby and attend the University of Toronto Law School? Hope you have $17, 000 WHICH IS THE TUITIONCOST FOR JUST ONE YEAR. If you include room and board, for a four year program, the cost jumps to $107,000. Not exactly small change and unless you won the lottery, someone is going to have to pay for it.

So you think that setting up an RESP is the way to go. Now you need to learn how RESP's work, how to maximize government grants, and what the various types of plans include. My personal opinion is that the best reference material for RESP's is from the Ontario Securities Commission. The OSC governs the sale of RESP products in the province of Ontario and their link explains in detail how the plans work.

There are two main types of RESPs:

1) RESPs you buy through a financial institution (including a bank, mutual fund company, brokerage firm, or trust company). These RESPs work a lot like any other investment account.

2) Scholarship plan RESPs, which you buy from scholarship trust companies. With these plans, you are part of a larger group of families who are also saving for their children’s education.

Most experts would suggest that holding an individual plan is best. In fact, the OSC has had to crack down on some sellers of RESP's for questionable marketing practices. The bottom line is simple; if you put money away into an RESP, get the maximum grants available, and do it for as long as possible, then those education costs will become something you are able to laugh off.

If you want to wait, then remember this simple fact - compound interest only works if money is invested for many years. For example - you decide on your child's 15th birthday to put $3,000 into an RESP. It earns the basic grant of 20% and earns 6% interest for three years until your child begins school. How much do you have to show for your money? $4,288. If you had invested that same $3,000 the day they were born, earned the same 6% interest over 18 years, you end up with $10,276.

Let's make it simpler - you invest $1,000 to start (age 0), deposit $100 per month and increase that by 3% each year. You earn the same 6% interest. How much at 18? $50,972 !!! Children are not cheap to raise and setting aside $100 per month is not something everyone can do. But when you see a $50,000 end result, it makes you wish that Michael J. Fox had his Delorean available to take you for a trip.

This won't work for everyone, but here is the ultimate way to save for a child's education. If you are lucky enough to qualify for significant child tax benefits, properly invested they will produce enough money for your child to pick any school they want. Just think about it - you have a child, the government gives you money, which you invest in an RESP for the child. The government then gives you grant money which is added to the RESP. What does it cost you? A big fat zero. Can anyone out there not see the humour in having the government fund your child's education?

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