Using free money to pay for my children’s education
Saving for your child’s education can be a bit of a challenge at times when so many other financial forces and obligations are pulling at and stretching your wallet. And then there are some parents who feel that their child should be funding their own education and learn the merits of hard work. While I see the merits of both sides, I think every child deserves an education and if I can help them out, why not? Besides, I’d rather spoil my child with education than a car or a thousand trinkets they don’t need. But what makes my decision a fair bit easier, is I’m essentially using free money to fund it.
Your saving ways
Parents in Canada have a few options when it comes to saving for their child’s post-secondary education. They can park their money in regular savings account at their local bank or credit union (earning a paltry 1 or 2%), open up a regular investment account, or open a Registered Education Savings Plan (RESP). Any funds withdrawn from an RESP must be used to fund education or education expenses (but depending on the plan, can be rolled into a retirement plan — but any grants received will be clawed back). But one of the biggest advantages of an RESP over the other options is they allow for tax-deferred growth – up to $50,000 of lifetime contributions per child. Tax is only payable upon withdrawal, and even then, are taxable in the hands of the child, which at that age, are probably in the lowest tax bracket anyways.
Show me the money
Okay, so where is the free money? Well, still the biggest advantage of an RESP is that the government will top up any RESP contribution you make by 20% of the first $2,500 per year and per child, for a maximum of $500. And lower-income families are also eligible for an additional Canada Education Savings Grant (CESG), which can add an additional 10 to 20% onto the first $500 worth of contributions, up to a $7,500 lifetime maximum per child. And for those that already receive the National Child Benefit Supplement, can apply for the Canada Learning Bond which gives you an additional $500 now, and $100 for every additional year, up until the age of 15.
Other provinces such as Alberta, Saskatchewan, and Quebec also provide additional benefits. I don’t live in any of those provinces and don’t qualify for the CESG, but I have been taking advantage of the top-ups.
Okay, but you still need to contribute?
Yes, you do. But the government has helped us out yet again. All children under the age of 18, are given the Canada child tax benefit – a tax-free monthly payment to help parents with the cost of raising the child (dependent on the family’s income). We receive approximately $50/month based on our income, and since it’s made out to our children’s names, we choose not to use the money for ourselves. But wait, there’s more…
In 2006, the Canadian government introduced the Universal Child Care Benefit (UCCB) to help subsidize the high costs of child care with $1,200 a year ($100/month) per child under 6 years of age, available to all Canadian parents, regardless of income.
And now for the numbers
So that’s $150 per month per child, I’m receiving for essentially free. So, for sake of simplicity, let’s just say instead of monthly payments of $150, we make an annual contribution to one child’s RESP of $1,800, starting in the year she is born, earning 5% per year, compounded annually, after 18 years, that would amount to $50,638.29.
But wait you say, the $100/month benefit is only available until they’re 6 years of age. Good point! And even though I would still be receiving the Canada child tax benefit, what would happen, if all the numbers were the same, but I decided to stop contributing completely after my daughter turned six? After 6 years, my account would be worth $12,243.44 and after 18 years, without contributing another dime from the age of 6 to 18, my child would have $21,987.46.
Not a full education, but not too shabby either, for not having to put in a single dime. And silly me, I forgot to add the extra $360/yr from the CESG and if you factor in compounding that annually, factor in monthly payments, et cetera, et cetera. You get my point.
The early bird gets the worm
I may be too lazy to do all the math, but I know one thing is for sure, for anyone who’s considering starting to fund their child’s education, start now. The earlier, the better. Every little bit counts. And using the government’s free contributions, there really is no excuse here not to save, unless of course, you’re facing grave financial difficulties.
But as a final word of caution, this IS your child’s education, so when choosing your investments I would tend to play it safe. Don’t tread too conservatively with your investments, but I would avoid anything risky. Yes, it’s about an 18-year time horizon, give or take, but with the CESG you’re already earning a 20% return on your contributions. And the last thing you want is to reach that day and not have any money for your son or daughter’s college education. So be smart about it and start now.