109 – Saving for Your Child’s Education

Wayne Kay 00:04
Saving for your children’s education. That’s our topic today on the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. 

I’m Wayne Kay. We’re going to talk about these child education funds. You know, how do you budget when you’re already maybe financially maxed out?
What’s a good way to go about saving this money? When should you get started? And what kind of a difference is this going to make? 

To tell us about this and more, Derek Chase from Chase & Associates Licensed Insolvency Trustee serving Vancouver Island Sunshine Coast, BC and BC North Coast, joins me now. Derek, thanks for being on the show today.

Derek Chase 00:49
Hi, Wayne. You’re very welcome. I’m really excited about today’s topic.

Wayne Kay 00:53
This is a topic we need every parent to listen to. Do you have kids at that age where you’ve had to use the savings for their education yet?

Derek Chase 01:05
Yes, we have ourselves so happy to pass on that experience. And also just what I know in general about the topic.

Wayne Kay 01:13
Yes, I bring it up because as a dad we had to do that as well. We saved up a lot of cash for the kids’ education. We really saw the benefits of it.

So that’s good. You and I will both be able to be able to share some information because sometimes, especially like right now, a lot of families may be having a little bit of a tough time when it comes to savings. But the importance of this is, we can’t express it enough, can we?

Derek Chase 01:39
You really can’t. And it’s one of those things that’s easy to kick down the road into the future and say, I’ll deal with it later.

But it’s hard to imagine 15 years down the road or ten years down the road just how important this topic can be. And it really is hard. It’s a tough situation when your life’s busy, you’re working, you probably have a young family, you have all sorts of demands on your time and your money.

How do you go about handling that? How do you go about prioritizing things and giving your kids opportunities to succeed? And it’s a good thing to think about and to put some energy into making choices around.

Wayne Kay 02:26
Yes, I’m loving the show already. So what’s some of your advice? How do you even save when your budget is already maxed out?

Derek Chase 02:33
It’s a really good question, and I don’t think anyone’s ever felt like, hey, I’ve got all this excess money, what do I do with it? That’s quite the exception.

As opposed to the normal situation. The normal situation is you’re trying to make the month work and you’re having all these people around you giving you helpful advice about, well, you need to save for your retirement, you need to save for a rainy day fund. You need to think about your kids’ education and what they’re going to do. It just seems impossible sometimes to satisfy all those things.

But I think the way to really frame it is not to have to do it all at once and get to the finish line all at once. It’s really framing it in terms of five year increments or some longer range goals and really just to kind of get the ball rolling just in the tiniest amounts, I think, is the way to approach it.

And specifically for children’s education, there is a product called a Registered Education Savings Plan or an RESP, which is an excellent way to do this for your children, mainly because the government will contribute some money to that as well. Now, there are limitations to that. 

Maximum contributions over the lifetime into a plan like that is $50,000, and the maximum contributions that the government will put in would be $7,200. Again, those numbers are big. There’s no way I’m ever going to do that in 2023 or 2022. But I always tell people to start small, start now, and to even get it going at $25 a month is a powerful thing to do.

And I think taking that even further, what if you don’t have $25? What if it’s all going to food or to some other housing or whatnot? I like to think about what your circle of people are like. There’s often settings, I think, especially when children are young, that the grandparents or the aunt and uncle or the really close personal friends –  they want to get presents, which is a natural thing to do. And in my mind, it’s pretty special to give the present of education.

So making that gift into an RESP is going to have a lot better long term results than buying some plastic toy that might get five or ten minutes of attention and then is gone. So it’s a matter of communicating that, talking about it with your family and friends and also internally with your own close family and saying, what are we going to prioritize here? 

And we always suggest to people, the first step is just to get that rainy day fund in the bank, a little bit of money in the bank. But again, accomplishing all these goals all at once I think is impossible. I think you have to take a very small monthly outlook to that and make it so small that you never think it’ll make a difference. That way the savings will continue month after month and not be interrupted.

Wayne Kay 06:22
And it has to be an automatic withdrawal. I mean, if you have to set it aside, you’re never going to do that. So it’s got to be something that comes right out of your bank account and goes directly into that RESP fund. I think that we all know that now.

Derek Chase 06:39
Yes, I would agree with that. And certainly something that you’re doing manually, you’re bound to forget and maybe not restart. So having the pre authorized transfer is fabulous. Maybe the one time bump up contributions comes from Grandpa and Grandma at birthday time, that sort of thing.

Wayne Kay 07:02
So as a parent who went through this, I’m so grateful we did, because we were a one income family, and money was tight. But it was a priority for my wife to make sure that she was putting this money aside for the kids’ education and after they get out of school. 

And especially now, if we look at students finishing their career, you’re coming out of there with the debt, school debt, and then you have to try to find a rental. And life is so expensive now. It really is a leg up for anybody who can do this for their kids. So once again, it’s such an important thing. 

So how do you go about doing this? Where’s a good place to put the savings?

Derek Chase 07:47
Well, as I mentioned, my advice would be the RESP. You could start with whichever financial services place you’re dealing with, whether that’s your bank or whether it’s some type of investment advisor, just letting them know that there’s a child in the picture here because they can’t read your mind. 

They need to know what changes have happened in your family, and if that’s a priority, they’ll take the steps to set up the account and set up the automatic contribution. So the spot to accumulate it is within an RESP, and the place to find that is going to be at your financial services provider, whether that be a bank or somewhere else.

Wayne Kay 08:34
Right. And when do you start?

Derek Chase 08:38
Yes, if it were a question you were thinking about right now, you would want to start it before the end of the year. Again, this government is going to contribute some money into that as well, 20%, up to a maximum of $500 every year. So, in other words, if you put $1,000 in there into that plan, this year, the government’s going to put $200. So that’s like free money. That’s a 20% return right off the pop. 

I always say starting sooner rather than later is the way to go. And even if you didn’t have $1,000 to do it, if you had $100, just get it rolling and get that subsequent monthly contribution going each month. Before you know it, time flies, as you know, Wayne, and as a result, five years will be down the road and you’ll have a nice little chunk of money there. 

And I couldn’t agree more with your earlier statement. It gives your kids just so many more options when they’re graduating from high school and deciding what to do at that point.

Wayne Kay 09:50
Yes, we never told them they had this fund either until they graduated. That was another important part. So it’s like we kept it kind of quiet and then it worked out wonderfully. And here’s the other side of it now, is that I’ve just become a grandpa, and Olivia is a little baby who’s going to be three weeks old.

She is three weeks old today, and we are already discussing this. So it’s a perfect time for us to be having this show. And they’ve already I think they’re just about to set up the RESP. So that’s three weeks old.

Derek Chase 10:27
Yes. That’s fantastic. And the real beauty of that is by starting it so quickly, you’re going to have a full 17 or 18 years of compounding in that plan that will really help that money grow and be there, be available. So again, starting it at three weeks is quite spectacular. 

But if someone started it when the child was ten, that’s great as well. But you’ve missed out on ten years of compounding and tax regrowth within there. So sooner the better is never more true than when you have a fixed timeline here, before a child is going to grow up and graduate from high school and then face further education expenses and choices.

Wayne Kay 11:15
How about you? You’re very similar to me. Is that when you would run into people, especially after you can put your kids through school with that RESP? When I would run into new parents, I would tell them we did not have the money to be putting this away, but we did, we made it a priority.

There was whatever the child benefits and all that kind of stuff, that all went directly into the RESP. And I always tell them to start it as quickly as they possibly can because I had no idea how much it would grow.

Derek Chase 11:43
Yes. As far as the growth goes, it’s hard to understand how much money can grow over time until you start looking at some of the charts. And when you project out over ten years or 15 years, it’s really quite dramatic.

And then ultimately it comes down to making choices around what’s important for you. Is it important for you to spend $100 on entertainment or is it important to save $100 for your child’s future? And when you start framing things in that sort of decision matrix, I think most people would want to have the savings for their child.

Wayne Kay 12:21
Yes, exactly. What other words of advice do you have regarding saving for RESP?

Derek Chase 12:29
Like I mentioned earlier, there’s lots of different places pulling for your money and time and attention, but certainly doing something even very modest can have dramatic positive factors influencing your child’s education down the road. So go for it, even if it’s only $20 or $25 a month.

Wayne Kay 12:50
Yes. Makes all the difference. Also, you know what, you mentioned grandparents getting involved, aunts, uncles, gifts that’s become a popular thing as well.  I actually know of somebody I work with where the grandma set up a RESP for the kids when they were born because she’s already paid off all the things she needs to.

There are rules, though, when it comes to who can set up an RESP, is there not? Or there can only be one.

Derek Chase 13:21
Yes, that’s something I would probably defer to the specific rules surrounding that. I would defer to the financial services provider that there’s always rules around these things, and I’m not going to pretend to be an expert on that. I just think it’s good to get the ball moving and take their advice as to how to max out your contributions, if possible.

Wayne Kay 13:45
Yes, okay. Well, any other final words? It sounds like we’ve covered a lot of it. It’s basically get started as soon as you possibly can. 

Oh, here’s the one. If somebody comes into a bunch of money, let’s say all of a sudden they get an inheritance of $10,000, can they then put that total amount into the RESP and play catch up and get grant money 20% on that, or is it maxed out per year?

Derek Chase 14:11
There’s a lifetime contribution of $50,000 into the RESP, I believe, and then the grant money from the government is topped out at $7,200, which is at a 20% contribution rate. So again, you’d want to take advice from the financial advisor as to how to best sprinkle that into the RESP to get full advantage of the grants.

Wayne Kay 14:38
Okay, that’s great. I’m glad we touched on this topic. Derek, thank you very much for doing this show today.

Derek Chase 14:45
Oh, it’s my pleasure, Wayne. You have a great day.

Wayne Kay 14:48
Once again, my guest today was Derek Chase. You can learn more, schedule that free consultation with Chase & Associates Licensed Insolvency Trustee through their website bankruptcytrusteebc.ca.

That is it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, if you want more information, you can always check out debtmatters.ca. Thanks for listening.