As summer dwindles down, we're getting closer to that day in the beginning of September where the wind seems to change -- and for many this is sign that back-to-school season has officially arrived. For most young parents, approaching the new school year means getting the family prepared and equipped, and that comes at a cost -- on average, Canadians spend $428 per child to get them ready for school. To be smart about it, we look for ways prepare and plan ahead so that the costs can be minimized.
Preparing a list of things you need, passing supplies between siblings, sharing costs among friends and other small tricks are ways that you can minimize spending for the school year for the time being. While the annual cost of sending your children to school is high, there are some much larger costs coming down the road if your child plans on attending college or university.
High cost of education
In fact, sending your child away to university for a four-year bachelor degree can cost anywhere from $60,000 to $100,000 (Source: Stats Can). Half of all Canadian university students end up needing student loans to fund their education and the average debt load those students have when they graduate is over $26,000. This can be a significant burden to a young individual trying to establish themselves, and many take ten years (Canada Student Loan Program) or so to pay off the debt.
RESPs and other savings plans
Here's the good news. Just as we plan and budget for each upcoming school year, there is a great way to save for these down the road costs. The government sponsored Registered Education Savings Plan (RESP) offers a tax-sheltered umbrella of up to $50,000 in contributions towards any Canadian child's education. The money can be contributed any time up to the year of your child's 17th birthday.
On top of that, the government offers a grant called the Canadian Education Saving Grant (CESG) where they will match 20 per cent of up to $2,500 in annual contributions. If you contribute $2,500, the government will deposit $500 into the RESP for your child. The lifetime maximum per child is $7,200. If you are not taking advantage of this program, you're leaving up to $7,200 on the table!
There is one further benefit. If you didn't start right away, you can double your annual contribution each year to claw back on previous years. So, the years you claw back, you can receive up to $1,000 of the CESG.
Example:
A family saves $2,500 a year for their child from birth until the child is 17 years old. They invest the money in a balanced mutual fund, which they expect to earn an average of seven per cent per year. What is the difference if this money is invested in an RESP versus a Non-Registered Account? $26,000!
If you already have an RESP account, now is the time to ensure you have an investment plan in place to get to your goal. If you have an idea of your child's area of interest and the university or college he or she might attend, check out how much you may need to fund that goal -- are you on track? There are several resources available to help you calculate the potential costs. Visit getsmarteraboutmoney calculator to estimate education costs.
Investment options for your RESP
Remember, a RESP is only a type of account. What investments you hold in it should be aligned with your goals and how much risk you can tolerate. Another important element of managing your investments to fund your child's education is to ensure your current portfolio reflects the number of years remaining until your child heads to university or college.
For example, if your child is only three years old, you have a long time before you need the money, and your ability to handle market fluctuations is greater. When you approach the year in which you need to withdraw the money, you don't have time to ride out market swings, so it's wiser to de-risk your portfolio and put your investments in less volatile instruments, seeking to protect your savings.
Having trouble thinking of a way to budget for RESP contributions? The Canada child tax benefit can be a great way to source funding. There are also other government incentives to consider like the Canada Learning Bond program in which lower income families can get a one-time bond of $500 per child born after 2003.
The most important thing is to have a plan in place to fund your child's education, commit and stick to your saving plan, and make sure your contributions are topped up for the year if you have fallen behind. Don't leave money on the table!
Pramod Udiaver is the Co-founder and Chief Executive Officer of Invisor Investment Management Inc., one of Canada's leading online financial advisors that provides personalized investment management services. Passionate about personal finance and a student of financial markets himself, Pramod & his team's mission at Invisor is to simplify investing and help Canadians reach their financial dreams sooner.
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