How Parents Can Give Their Kids A Financial Leg Up
In a Globe and Mail column last year, Rob Carrick took parents to task for not saving enough for their kids’ education. He said that parents talk a good game – 82 percent want their children to attend University – but the numbers suggest they’re not backing it up with financial support.
In a survey of 1,538 young people aged 15-33, 60 percent said they received nothing from RESPs. That’s a shame because RESPs are the second best deal going today (the first being an employer-matching RRSP).
Where else can you get a guaranteed 20 percent return on your money? That’s right, the government kicks-in 20 cents for every dollar saved in an RESP, to a maximum of $500 per year – or $2,500 saved – with a program called the Canada Education Savings Grant (CESG).
Think of RESPs as insurance – protection from the chance that your debt-ridden adult children will have to move back home after graduation because they can’t afford rent.
I get it – there are a lot of competing priorities for parents and so putting your child’s future education needs ahead of present needs such as mortgage payments, transportation costs, daycare expenses, not to mention your own retirement savings can be a difficult choice.
But too many parents have the mindset of, “I didn’t have any help and I turned out just fine.” If you have the means to help your children – not just with a blank cheque but also with guidance and support – then why not give them a leg up?
Summer jobs don’t pay nearly enough to cover the cost of tuition, books, and room & board if you’re living away from home. And, sure, you can work part-time during school, but expect to struggle a bit more in the classroom.
Here’s what it costs to attend University in Lethbridge, Alberta for just one year (two semesters, eight months).
- Tuition and Fees (10 courses per year) – $5,300
- Medical and Dental Plan – $250
- Books and Supplies – $1,250
- Living Expenses – $3,800 to $8,000
- Total – $10,600 – $14,800
At the top-end, a four-year degree costs close to $60,000 in today’s dollars. In 18 years, expect those costs to exceed $100,000!
So how can parents help? If you have the means to put away $200 per month from the time your child is born until he or she turns 18 you’ll end up with $83,808 saved. That assumes 5 percent annual growth, plus the $480 CESG that you’ll get from the government each year.
Related: How to get your RESP account started
I realize that saving $200 per child per month is no small sacrifice for most families. Heck, I’m not even putting that much away yet for my kids’ RESPs. The good news is that you can catch up one year of contributions each year, even after your kids get older. For example, in a few years I might want to contribute $5,000 per year into an RESP and then I’ll get $1,000 worth of matching grants. The lifetime CESG grant maximum is $7,200 per child.
Mr. Carrick suggests that parents put their own retirement savings on hold for a while so they can build up some RESPs for their kids. I say that it’s okay to start small with RESPs – $50 or $100 per month as soon as your child is born. Use the money that you get from the Universal Child Care Benefit to start an education savings plan and then add to it as your budget allows.
When our first child was born in 2009, we immediately opened an RESP for her and began saving $50 per month. We bumped that up to $100 per month the following year and then, when our second child was born in 2012, started saving a total of $200 per month.
This year, with the new enhanced Universal Child Care Benefit, we’re getting an additional $120 per month ($60 per child) and so we’ve decided to increase our total RESP contribution to $300 per month.
How is our plan working out so far? We invest the RESP contributions in TD e-Series funds and today the account is worth just over $14,000:
| Market value | |
| GIC / Term deposit | $2,694.11 |
| Canadian index (TDB900) | $3,573.51 |
| U.S. index (TDB902) | $3,987.81 |
| International index (TDB911) | $4,018.36 |
| Total | $14,273.79 |
If we continue at this contribution rate, and we assume 5 percent annual growth, the RESP portfolio will be worth close to $97,000 in the year that our oldest child turns 18. While that may not be enough to cover the full cost of education and expenses (for two) in 2027 dollars, it’ll be enough to give our children options when it comes to choosing their post-secondary opportunities.
Final thoughts
Parents – the most important step is the first one: open an RESP account and start off with small monthly contributions. You’ll get access to the Canada Education Savings Grant and Canada Learning Bond (other provincial grants may also apply).
Bump up your contributions as your income affords it, but don’t feel you need to max out your contributions ($2500 annually, per child) in order to make a difference. As my example above shows, even $100 or $150 per month adds up to big savings over 15 – 20 years.
Finally, avoid group RESPs and Scholarship Trusts – they’re loaded with restrictions and fees. These types of education savings plans are frequently sold at trade shows and aggressively marketed over the phone and door-to-door. Do yourself a favour and set-up an RESP plan through your bank.
Hi Robb,
I think the $83,808 figure for savings after 18 years is based on the assumption that CESG grant will continue throughout this period. But as you point out the lifetime maximum is $7,200 per child. So the figure is probably closer to $82,258 (assuming contributions continue and are made at the end of each month). But it’s still totally worth it, of course. 😎
Hi igra, you’re right of course – the CESG will max out at 15 years in my example. Definitely still worth it 🙂
I noticed you are using TD Funds. I’m doing the same thing with the same funds with one difference, I’m using the tdb909 bond fund instead of the GIC. I’d like to have more information on why you chose the GIC instead of the bond fund.
Hi Matt, the GIC / Term Deposit is a bit of a long story. Basically TD set that up for me in order to administer and receive the ACES grant (Alberta provincial grant) and I made about a year’s worth of contributions to it before I set up the e-Series portfolio (which is held on TD’s Waterhouse side and I pay an account fee of $50 a year).
I’ve tried unsuccessfully to transfer the funds from the term deposit into my e-Series account, but TD said collapsing the term deposit account will mean forfeiting the ACES grant for some reason.
So I’ve left it alone and focus instead on building up the equity portion with e-Series funds. When my kids get older I’ll re-look at the fixed income components and make adjustments.
Long story short, you should just stick with the e-Series bond fund and ignore whatever mess I’ve got going on with that term deposit 🙂
Agree with Robb, even starting small and young is better than nothing. If you cant afford $50 a month , chances are your mortgage wont be done by the time they are in university so you wont be able to find thousands to help.
There is an extra 10% for kids in Saskatchewan
The challenge here is many family homes are too far away for kids to live there and commute to university. Rents are $1000 for a 1 bed apartment, few halls of residence.
I kept a list when my son did it and Robb is correct in figures. Add the income tax on and its $22k a year of Mum and Dads gross income . Good luck if you have several in at one time or out of province flights . Don’t assume kids can work term time if your child isn’t a genius they need time to study.
It’s not easy, but it has to be done! Even putting a little aside for my godson 😉
In every future ‘baby budget’ I do; the RESP is the first item I add after all our fixed expenses. It’s so important!
That is a great point to highlight. That every little bit you can put away over that long of a time period helps. Instead of looking at it as if you cannot put away $2,500 a year and giving up on the idea of an RESP. Having the mindset that you’ll put away as little or as much as you can afford it all helps. Maybe even Christmas, and Birthday presents from the grandparents while the kids are young can go towards there RESP. The toys will be long forgotten but the memory of tuition support from parents and grandparents will be remembered forever.
Thanks for sharing,
Robbie
When I moved to Canada with my parents, starting an RESP was one of the first things my parents did. By the time I started University, there was enough money to completely cover my first semester, including living in the dorms and a meal plan, a new laptop and all the books I needed. This was an expensive first semester at nearly $10,000 (about 11 years ago). There was some money left for my second semester and with my co-op money and a scholarship, I was able to pay in full for everything again. After the first year, I was making enough money from co-op to almost support myself.
Had I been born in Canada, my entire education would have been paid for if my parents saved at the same rate. RESPs are great and it will be the first thing I do when I have kids.
I completely agree with saving for your kids education… IF you can afford it. There’s no rule that says we have to put our kids through school. Teach them what a work ethic is, teach them how to manage their money and even without your help, they’ll figure out a way. 6 roommates, crappy house, no car… You can do life pretty cheap and tuition can be saved over 4 months of summer easily. Teach your kids real life skills. There are better summer jobs than McDonald’s and Starbucks. I started working summers in ’95 (i was 16) and have never in my life made less than double the minimum wage. Just please don’t turn your kids into lazy, entitled pieces of crap. No one wants to hire those. Chances are if your kids move home, it’s your fault too.
Sure wish I had known about avoiding the group RESP plans like the plague back when we started ours. The person we worked with was aggressive yet personable,and in our sleep deprived, yet wanting to ‘do it all right’ state, set up a contract (which, of course, included all fee’s being paid up front and a whole slew of stipulations….) When my husband and I look at it now, we sure wish we had done a little more research…however, at least we started the habit of putting away a little each month.
My parents were able to pay for one year of my education, and I hope to pass the same gift on. Also hoping that our three kids are able to pay for a large portion of their education themselves through learning the value of hard work, wise spending and saving.:)
I wonder if the government will bump up that figure from 7200 max to ???
Anyone know if this is being considered?
When I was in university I worked a lot during the year and full time every summer. I took less credits during the year and took one or two courses in the summer so I could work during the year. I still ended up with a personal loan. I didn’t qualify for OSAP because my parents’ income was too high. I wish I could have focused more on my studies and I want that for my kids. I’m so grateful the government kicks in 20%. I have a family resp and contribute the max for both kids each year. THEY BETTER USE THE $!
We’ve been setting aside money each month for RESP. It’s a small thing you can do to help your kids in the long run.
Something that never seems to get talked about is that we, the parents, assume our kids will go on to post secondary education, but this isn’t the right path for everyone. In hindsight I wish I had structured my education savings for my kids very differently.