https://www.financialresuscitationwithruthy.com/post/how-do-resps-get-paid-outA couple months ago, I was asked how much was I setting aside per month, towards my kid's post secondary education?
This led me to thinking about first time parents and even seasoned parents with older children and the steps that parents need to take to set aside enough money for their children's post secondary education.
Why?
I think we can all agree as parents that we would like to see our children succeed with limited struggles. Though we cannot prevent their lives from being completely struggle free nor would we want to, we can try to lessen their financial struggles in regards to student loan debt. If you have the means to help your children with their post secondary education costs, I'm sure it will be greatly appreciated when they become adults!
If your adult children can walk out with their diploma or certificate in hand, ready to take on the world and not be shackled by student loan debt...oh what a feeling!
But how will this happen without some proper planning and preparation?
How does a Registered Education Savings Plan (RESP) work?
Step 1: Discover your Free Money
Did you know?
The Federal government has many programs to assist parents with savings up for their child's post secondary education. The most well known one is the Canadian Child Benefit, which is provided each month IF you file your taxes and your net family income isn't too high.
Although this money isn't specifically designated for education, parents could consider it free money that could be used towards post secondary educational savings!
For more information about free money from the government check out this blog: Free Money for Canadian Families
Second and maybe lesser known is the CESG:
The CESG- Canada Education Savings Grant program applies once you set up an RESP for your child. Next, the Federal Government matches that amount up to 20%, up to a maximum of $500 per year (with additional grants available for lower income families) and up to $7,200 per child's lifetime total.
So, let's work backwards with these numbers. If you were able to put aside $2,500 per year (20% of $2,500=$500) per child (wow sounds like a lot!)
which is approximately $208 per month (ok, maybe...)
then you could get the FREE maximum lifetime total amount of $7,200!?
(https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-education-savings-plans-resps/canada-education-savings-programs-cesp/canada-education-savings-grant-cesg.html)
$7,200 which might not sound like a lot of money, but it is currently almost a full year of tuition at most public post secondary institutions.
The current cost of post secondary education ranges from $2,500 to $11,400 a year, depending on the school and program you’ve chosen. Usually privately funded institutions are on the higher end of the spectrum
Something to keep in mind:
Every family receives a different amount from the Federal government based on their Adjusted Family Net Income.
and number of children
So if you receive No money from the federal government,
consider yourself wealthy and be happy!
If you receive some money from the government,
consider it free money!
and consider using it towards your children's education!
Next
Step 2: Calculate the cost?
How can we calculate how much a post secondary education is going to cost in the future? Whether your child is 14 years old or 2 years old, there is a calculator or two for that!
I love Calculators!
www.getsmarteraboutmoney.ca has a calculator for everything and it's Canadian.
Start with their Education Cost Calculator:
It starts with: Costs
This will be more difficult if your child is an infant and you don't know what their future career choice will be. However, you could always select your province and the nearest school and a 4 year program of study, just to give you an estimate. Try to estimate on the higher end so that you can prepare more. I think it's better to overestimate than to underestimate.
Unfortunately this calculator only includes publicly funded post secondary institutions so if you are looking at a privately funded institution than you will have to go their specific website and look at the cost of tuition.
Also, this calculator does a breakdown of the costs even further as you scroll down.
This chart is fully editable:
It immediately gives you the current estimated cost of tuition for your selected school and province but you may have to take those current numbers and account for inflation with an additional Inflation Calculator, if your child is still quite young.
The calculator gives you the option to edit the costs for
Room/board
Food
Books
Transportation and other.
Again, you still need to account for inflation. So, you could estimate amounts for room, food, books and transportation in today's costs and then account for inflation with an inflation calculator.
(https://smartasset.com/investing/inflation-calculator)
Funding:
You will have to estimate any funds that will be available for your child or gifts from relatives and whether your child will work while they go to school. Or you could go with the worst case scenario of zero money and see what the total cost is.
Make sure you follow the instructions so that you don't overestimate scholarships amounts because this Step multiplies your funds over the 4 years. So if you only have funds available for the first year of study, then you will have to divide by 4 to accurately represent the funds provided for your child.
Results
This next step hopefully provides you with an accurate representation of how much you are either lacking or if you will have sufficient funds for your child's educational expenses.
Student Debt Calculator (Optional)
This calculator states that this is optional but to me this is crucial to determine how burdened by student loans, your child could be in the future!
It determines how student loans could prevent your child from living their life and being able to buy a home or travel. How much they will be shackled by student loan debt!
And it provides 3 different payback options designed to show you the total student loan interest paid. Which could be a lot more depending if they take longer to pay off their loan.
As you can see in the above example, I chose to display the difference between paying back the student loan over 5 years vs 9 years to demonstrate the difference in total interest costs.
Step 3: Create a Plan
Remember: Don't forget to make sure to set aside money for your own retirement before you set aside money for your children's education because it is not certain that your child will attend post secondary school but you definitely will retire at some point, barring death before retirement.
Also, your child will always be able to earn more money but it is unlikely that you will be able to continue working in retirement.
Once you have estimated the total cost of your child's education excluding CESG government benefits, decide how much you can afford to set aside, whether that is $100 or $200 a month? Ask yourself: is it reasonable for your budget?
Now take that monthly amount that you have decided upon in your budget and use another calculator on the getsmarteraboutmoney website, it's called the Compound Interest Calculator and I've written a blogpost about it before called How Compound Interest Could Make You a Millionaire
This calculator allows you to input how much you can reasonable set aside each monthly consistently for your child's education and estimate with a 7% interest rate what their RESP could potentially grow to within 18 years or less. You can always adjust the interest rate to reflect how you think your investments will fair in the market.
(https://www.wealthsimple.com/en-ca/learn/average-stock-market-return)
(Unfortunately this doesn't include any investment fees depending on what your RESP is invested in. For more information about fees in investments check out this blogpost called What are Investment Fees Costing You )
Here are the results:
I used our example of $208 per month and invested it so that it earned a 7% interest rate and the results are potentially earning $44K in interest for a total of $89K. Remember, this is again without fees and without the additional $7200 from the CESG grant. If you were able to set aside $208/month, invest and earn a total of $89K, than this would potentially cover some of the total costs of post secondary education.
Start looking at researching Investment options for your child's RESP. There are a lot to choose from.
I have an Basic Investing course for beginners that you can check out if you don't know where to start and would like some financial literacy teaching and coaching.
Step 4: Be Consistent and Disciplined
Even if you just start with a smaller monthly amount and later added more money into the RESP, this is better than nothing. The sooner you start with Compound Interest the better!
Put it in writing in your monthly budget to set aside money for your child's RESP,
or put it on your calendar to remind yourself,
or as an automatic withdrawal
And watch the funds start growing!
Remember that you don't have to save up the full amount for your child. Your child will hopefully be able to work during high school to gain some job skills and hopefully be able to work for 4 months during the summer breaks of their post secondary education years.
In the meantime, teach your child good money habits so that when they do attend university or college, they don't spend all of their hard earned money on frivolous things, only to have regrets later on.
I think the biggest financial sin is having debt that is unrelated to tuition but instead due to lifestyle choices.
Yes university is a fun and exciting time but it doesn't have to cause you to have regrets later in life.
Now Go and Be Intentional with your RESPs!
Update:
Even though the Federal Government has eliminated interest on student loans, your province may not have done the same.
It's never a waste to save money for a specific purpose.
Please check out: How Do RESPs Get Paid Out for more information.
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