Kids. They grow up so fast, don’t they?
Doesn’t it seem like just yesterday your child was dreaming of becoming an astronaut, a doctor, a taxidermist – the list kept changing! Then one day you noticed that helping them with their math homework wasn’t so easy anymore and their science project led you to the ominous second page of Google search results.
Suddenly, their lofty (and expensive) childhood dreams didn’t seem so far off – but will the funds for their education be there when they need them?
Every parent wants to support their child’s future, but for many families saving for post secondary education can be a daunting task. After all, the average full-time undergraduate tuition fee this year rang in at $6,3731, which amounts to just over $25,000 for a four year program. And that’s not even counting books, food or lodging!
So I spoke with Jason Ransome, Financial Advisor at Ransome Financial Inc., to find out how parents can stop procrastinating and start saving for their child’s education.
I started my investigation at the root of the problem.
Q: Why do parents procrastinate when it comes to saving for their child’s education?
Jason: The number one reason people put off saving is a lack of funds. We’ve all heard the saying “pay yourself first” but the problem is nobody seems to do it. When parents are saving towards their child’s education they’re looking at it as an added expense, but it’s actually a savings opportunity. And the sooner you do it, the more you’re able to maximize the opportunity.
Also, people feel they have a lot of time. Well, time flies and we lose track of it! We start off with great intentions, but our lives are busy and time gets away from us.
Q: What are some of the mental blockers keeping parents from saving for their child’s education?
Jason: Planning for 15 years in the future is much harder than using your money for something you need or want right now – it all comes down to procrastination! Plus, we tend to adopt the mindset that when we do finally get around to saving, we’ll just save more at that time but it never ends up happening.
There’s always an ‘as soon as’, like ‘as soon as I finish paying off my car, I’ll be able to put more money towards it’. But something new always comes up. At the end of the day, if you ask parents they’ll tell you that saving for their child’s education is at the top of their priority list, but based on their actions it’s often at the bottom.
Q: When should parents start saving for their child’s education?
Jason: Today! The sooner you start the better. As with any long term savings plan, if you save earlier you can contribute less because you’re investing more often and over a longer period of time. The sooner you start saving, the more compound interest you can accumulate.
If you wait too long then you end up chasing an interest rate. And in today’s low interest rate environment you can’t depend on a rate of return, it’s all about how much you save. For example, if your child is a few years away from school and you haven’t saved enough, a high interest investment might help you get there but it comes with more risk – generally, the higher the rate of return, the higher the risk.
Q: Is it ever too late to start saving?
Jason: It’s never too late, but like I mentioned your time horizon will dictate how much risk you can take with your investment. Essentially, you want your investment to be structured more aggressively in the early years, and then the older your child becomes the more conservative your investment should become because you won’t have time to recover from negative returns.
Also, if you’re investing in a Registered Education Savings Plan (RESP) – and I encourage parents to do so – then there are a few deadlines to be aware of to maximize the Canada Education Savings Grants (CESG) you can receive from the government.
Q: Before we go into detail about that, can you explain what an RESP is? What do parents need to know?
Jason: An RESP is an investment vehicle used by parents to save for their child’s post-secondary education. The money you invest in the RESP is tax-deferred and when you open an RESP, the government will help you save for your child’s education through Canada education savings grants. These grants are essentially incentives for parents to stop procrastinating and start saving!
Here’s how the grants work: Each year, you can contribute up to $2,500 into the RESP. For every dollar you contribute, the federal government will top up your contribution by 20% up to a maximum of $500 per beneficiary, per year (got it? that’s $2,500 in contributions * 20% = $500 grant money).
You can contribute up to $50,000 in your RESP account but the grant money will only apply to $36,000 total within the rules of the yearly maximum. That equates to a lifetime maximum of $7,200 in grant money!
If you miss a few years and have unused contribution room available, you can contribute one previous year’s worth of contributions each year.
Q: And parents need to stop procrastinating because there are deadlines for RESP contributions, right?
Jason: Yes. For instance, beneficiaries of the RESP qualify for grants up to the age of 17, and there are specific contribution requirements to receive these grants.
We referred to the Canada Revenue Agency website for specific details2:
RESPs for beneficiaries 16 and 17 years of age can only receive grant funds if at least one of the following two conditions is met:
- You contribute (and don’t withdraw) a minimum of $2,000 to the RESP before the beneficiary turns 16;
- or you contribute (and don’t withdraw) a minimum of $100 annually to the RESP in any four years before the beneficiary turns 16.
Essentially, at the very latest you have to start saving for your child before the end of the calendar year of their 15th birthday in order to be eligible for CESG.
Q: You just can’t beat a guaranteed 20% return on your investment, but what if you invest in an RESP and your child doesn’t end up pursuing post secondary education? Do you lose all of your money?
Jason: No! That’s a misconception. If your child doesn’t end up going to college or university you won’t lose your investment, but you will have to return the grant money provided by the government. However, you will keep the compound interest that has accumulated. You can then transfer the RESP money into an RRSP (assuming you have contribution room) and shift the savings towards your retirement.
Q: What do you recommend as a first step for parents who are procrastinating?
Jason: A financial advisor can really help kick start you and trigger you to take action at life milestones. It’s like having a workout buddy at the gym – you need someone to be accountable to.
You can have all the good intentions, but sometimes you need someone to call you out on saying “I’ll go tomorrow”. Your advisor will take the time to understand your goals, help you get clear on your priorities and can help you take action. And they’ll follow up with you if you try and procrastinate.
Q: Once parents put a plan in place, how can they stay on track?
Jason: When saving for education or retirement, I always recommend setting up monthly automatic withdrawals because people will budget their life based on the income they take home. You need to adopt the mindset of ‘pay yourself first’. This type of ‘forced savings’ takes the emotion out of it. If clients are really concerned about what they can afford, I tell them to start small – even if it’s just $50 a month – because something is always better than nothing. Then at the end of the year, I encourage them to try to top up their RESP to get as much grant money as they can.
Q: Final question – parents are working hard to save, but what’s a reasonable amount to expect the child to contribute?
Jason: Every situation is different and it depends on when the child has money to start saving. You wouldn’t want to tie all of their money up in education savings but it is a good way to teach them how to budget and save for the future. It teaches the child to invest in themselves.
Given all of Jason’s insightful advice, it’s clear there aren’t any pros to procrastinating (get it?) when it comes to saving for your child’s post-secondary education. It doesn’t have to be difficult, but it all starts with a financial plan. Visit foresters.com to learn more today.