This post is part of the Big RESP Series. See the entire series here.
See the previous post on How To Get Started.
Since the government started giving grants for RESP contributions in 1998, the RESP program has become quite well known and has become a new source of stress for new parents. I know a lot of friends who have set up RESPs for their kids which is great since most of my friends are older parents and have reasonably good finances. For someone who is younger and/or doesn’t have great finances, RESPs should probably be a lower priority to things like lowering debt and saving for retirement. It’s important to make sure your own finances are in good shape before saving for a future expense when you don’t know how much that future expense will be or if it will even occur. There is no point in making RESP contributions and then later on you have to withdraw the money to pay for the mortgage.
Try not to listen to the hype from investment companies – the same people who write the ads that try to scare you into investing with their company (you need 70+% of your income to retire or you will be living in a cardboard box) also create the ads for RESPs. Investment companies often come up with fairly “worst case” scenarios for their projections of how much post secondary education will cost in 18 years or so. They try to make it sound like your child’s education will cost a certain large amount and if you don’t have that much saved up when they finish high school then they won’t be able to go on to post secondary school.
The reality is that most parents (hopefully not me) are still working when their kids go to school so they always have the option of diverting some of their income to make up any shortfall. The investment company ads also don’t seem to include the fact that most students work during summers and can offset a portion of their schooling that way. The last point I want to mention here is that like most things in life, post-secondary education involves choices that cost more or less money. If a student can live at home and go to school, that is much cheaper than going to school in a different city. The student may not like that choice but sometimes money (or lack of) can help simplify the decision making. Other factors that I can think of are housing – do they live in a dorm, shared accommodation or their own apartment? Do they have a car? All these choices will play a significant role in the amount of money required for the students education.
Summary
RESPs are a good thing but they are not as important as your family finances. You are not doing the child any favours by maxing out the RESP grants but they can’t participate in some activites because you don’t have enough money.
Establish your family finances first, then worry about the RESPs. You can carry forward the contribution room so there is no rush to start the account as soon as the child is born.
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Maybe people should just lower their expectations and realize that their kids are going to be working in sweatshops when they get older and they will be living out of boxes eating scraps.
Since the only real way to people to act is to scare the crap out of them (it sucks, but it’s reality). If you tell them they need to put 500 bucks a month away for 18 years and they reach only half their goal then you’ve done your job. Their kids will be better off than the kids next door that didn’t plan ahead. Their retirement will be better than probably 75% of the other people if they reach only half of the 70% goal. What’s the harm in that?
I’m putting enough away in an RESP for each of my kids that hopefully I’ll pay for about half of their schooling. They are 6 and 2 right now. I had to pay for it all through student loans, so hopefully they will be a few steps ahead of my situation.
My main plan is to try and talk them in to not going to university directly out of high school. I would like them to work for 2 years and save most of the money they make, I want them to work before school so they learn what work is and how much better school and a cushy job is in comparison. That’s many years away, so we will see how things change between now and then.
Thanks for the comment TraciaTim:
Unfortunately, you might be right about the need to scare people. My point is that if your financial position is not very strong, there’s not much point in having an resp if you end up raiding it to pay the mortgage later on. I think financial planning has to look at every aspect of your finances and evaluate which areas have the highest priority and which ones can wait.
Interesting plan about getting them to work for a couple of years before college – the opposite to most parents (especially mine).
Mike
Traciatim: Often that plan backfires. Once the kid starts getting a salary, they aren’t interested in going back to being a starving student for 4 years, even if it will (eventually) lead to “easier” work and a higher salary.
4 years seems a lot longer when your 20 then it does later in life…
I would think a potential problem is that the kid might forget a lot of what they learned in their last year of high school over a couple of years.
Mike
Traciatim: I think I’m with Mr. C on this one. I think “momentum” could well play a role here. Getting back into the habit of studying is harder to do once you’ve stopped for any significant amount of time even more so if you’re giving up a regular salary. That isn’t to say that it can’t be done, but I’d worry about doing such a thing if the child turns out to be the type that just doesn’t care much for school in the first place.