“When you’re a new parent, you’re concerned about doing the right thing. You’ve got this infant with so much potential. And hearing that you may not be able to afford their education makes it very hard,” says Mike Maloney, a Saint John, N.B.-based father who started saving for his son's education when little Simon was only a few months old.
But how do you find the money to save for something that seems so far away? Especially when unexpected events like the COVID-19 pandemic impact your finances. Plus, you have all your usual monthly expenses as well as your own retirement savings to consider.
Sarah Deveau, mother of three and author of Money Smart Mom: Financially Fit Parenting and Sink or Swim: Get Your Degree Without Drowning in Debt, provides the following smart ideas for putting money aside for your child’s education:
1. Set up an RESP
A registered education savings plan (RESP) is the easiest way to save and grow your child’s education fund, says Deveau.
How do RESPs work? An RESP is a tax-preferred savings plan designed to help you save for your child’s post-secondary schooling. With an RESP, the government will match 20% of your annual contributions up to $500 per year (with a lifetime maximum of $7,200) for each child. That’s more than seven grand in free money – plus whatever investment growth that money generates while it’s in the plan.
An additional tax advantage comes in when you take the money out. When this happens, the taxable portion of the withdrawal will be taxed in your low-earning/no-earning child’s hands, rather than yours.
What if you think you don’t have enough to contribute to an RESP? “What many parents don’t understand is that when you create an RESP it can be flexible,” says Deveau.
“If you can’t commit to investing $20 or $50 every month, don’t worry,” she says. “You can wait until you get a cash gift from a family member like a grandparent and then make a lump-sum payment.”
Or, you can replace a non-essential item from your monthly budget with an RESP contribution. For example, have you been commuting less or working from home more often these days? Then you can temporarily take the money you originally used for transportation and put it into your child’s RESP.
If you’re on a very tight budget, you can start small and place $5 or $10 a month into an RESP. You can always adjust the contribution amount once your finances are back on track.
- Estimate how much you need to save with this RESP calculator.
2. Make your RESP contributions automatic
If you can commit to regular contributions, ask your financial institution to set them up to automatically go from your savings account into your RESP.
“Some parents contribute their monthly Canada Child Benefit into RESPs,” says Deveau, “which is often direct-deposited into their bank accounts anyway.”
This is how John Elliot, a father of two in Kitchener, Ont., contributes to his kids’ RESPs. “We set it up so that our contribution comes out a day or two after we receive the benefit,” he says. “So we really don’t have to think about it.”
- What happens to an RESP if your child doesn’t go to school? Don’t worry, you’ll still have options on what you can do with an RESP.
3. Cut back on certain social expenses
Even though the world’s reopening, we’re still encouraged to practice social distancing to help reduce the spread of COVID-19. This means maintaining our social bubbles during events, gatherings and get-togethers.
Because of this, you’re probably thinking twice about sending your kids to play centres or throwing them elaborate birthday parties. The one benefit to this situation is that you’ll probably save some money.
Let’s say, before the pandemic, you may have spent somewhere around $200-$300 on your child’s birthday. But now that you’re throwing them a smaller party or a virtual party, you can probably cut that amount back to $50-$100. You can then invest the other $50-$200 into an RESP.
“You’ll immediately have that money in the account, and you’re still having a party,” says Deveau.
Also, have all those months of quarantine got you into baking? Then you can save even more by making your own cake instead of ordering one from the bakery.
4. Ask your family for RESP donations
Special occasions like birthdays, graduations and holidays are excellent opportunities to encourage grandparents, relatives and friends to contribute to your kids’ RESPs. So ask your family members to provide RESP contributions instead of a conventional gift.
Worried your kids will hate this idea? Babies and toddlers probably won’t throw a fuss over it. But if your child or teen wants actual presents, ask your family to place a portion of their gift budget towards the RESP. They can then buy something your child can unwrap with the rest of the money.
- Need help getting started? An advisor can discuss all your options and help you build RESPs into your plan. Most advisors now offer to speak to Clients by phone or video chat. Find an advisor today.
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.