One of the first things I did after my daughter was born was start saving for her post-secondary education. Setting up my baby’s college fund was one of the best ways I knew of to provide her with long-term financial security. More accurately, long-term financial security I never had.
Why I’m saving in my baby’s college fund
I am not sure if my daughter will pursue a post-secondary education. The world is changing quickly, and it’s impossible to predict what will be the best careers two decades from now, and make guesses about what education and skills those careers will need. I do see that over time the value of a post-secondary education is decreasing. However, it’s also true that those with higher educations tend to earn higher incomes.
I have both a Bachelors degree and an MBA. All in, I completed 7 years of post-secondary (there’s half of a Master of Science in there, too, which is how I ended up with an odd number). I grew up in a low-income household, but my education has allowed me to command high salaries and ultimately lift myself out of poverty. It’s because of the degrees I have that I am able to earn the income I do.
Having experienced both financial scarcity and financial abundance, I can tell you simply that life with money is easier. Furthermore, the more money you have, the easier things tend to get. I know it’s bad form to talk this way in the personal finance community, but I really believe the people who say “money can’t buy happiness” have never been poor. Money buys security, comfort, opportunity, and those things make you happy.
One of the biggest financial struggles in my life was paying for my education. My parents had no money saved, so I paid the costs of my post-secondary entirely out of my own pocket. I also didn’t have the luxury of living at home through my degrees either, which meant I managed all my living expenses as well. I refuse to add up the total of this because it will make me cry. It is likely I would be $200,000 richer if I had not had to pay tuition and keep a roof over my head during school.
How much will her university education cost?
In order to spare my daughter the financial hardships I endured in my twenties, it is my goal to pay up to $100,000 for her post-secondary education, should she choose to pursue it. It’s possible her studies will cost more. After all, tuition & fees have 18 more years to rise before she begins university.
In Canada, post-secondary institutions are government-subsidized. This makes them significantly cheaper than schools of the same caliber in the USA. I completed my undergraduate degree at a university that ranks in the top five in Canada, and never paid more than $5,000 per year in tuition and fees. Imagine attending an Ivy League for that price! Even if fees triple by the time my daughter goes to school, her tuition will be $15,000/year or $60,000 for a 4-year degree.
With these assumptions, $100,000 is enough to pay for an undergraduate degree in full. This will ensure she does not accumulate any crippling student loan debt or suffer long-term financial hardship because of her education.
What is the Registered Education Savings Plan?
The Registered Education Savings Plan or RESP is yet another awesome tax-advantaged savings vehicle available to Canadians, much like the Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). The RESP is designed to help and encourage parents to save for their child’s post-secondary education. You can read more about the RESP on the Government of Canada’s website here.
Saving for your child’s post-secondary education in the RESP is the only way to receive any qualifying grants from the government. The Canada Education Savings Grant (CESG) is up to $7,200 and the Canada Learning Bond (CLB) can be as much as $2,025. That’s over $9,000 in free money! Both are deposited directly into an RESP, so you have to have an account in order to receive them! I go into detail about what grants are available in my post, Single Parent Finances.
How I’m saving $100,000 in my baby’s college fund
I plan to accumulate at least $80,000 in my daughter’s Registered Education Savings Plan (RESP). The RESP has a lifetime contribution limit of $50,000, which means I’m expecting grants and investment returns to add an additional $30,000. It is possible the portfolio will perform well enough to amass my full $100,000 goal, but in case it doesn’t, I will save the remaining cash elsewhere or pay out of pocket as my daughter attends school.
My Current Baby’s College Fund Savings Plan:
$50,000 in direct contributions to RESP + $7,200 Canada Education Savings Grant (CESG) + $725 Canada Learning Bond (CLB) + $22,075 in interest, dividends & capital gains + $20,000 additional savings outside RESP = $100,000
Your breakdown for your child might look different depending on what grants you qualify for and how your investments perform. I qualified for the CLB the year my daughter was born and the year after, but won’t anymore, which is why I only received $725 of a possible $2,025.
Putting the college savings plan into action
In order to open an RESP, you need your child’s Social Insurance Number. This can take a few weeks to get, particularly when you have a newborn on your hands. Once you receive your child’s SIN, you can open an RESP. This can also take a bit longer to establish than a regular bank account. My baby was born in August, but her RESP wasn’t up and running until October!
I opened a Registered Education Savings Plan (RESP) with Questrade with an initial deposit of $1,000. Questrade is an online discount brokerage which lets you manage your own investment portfolio. This means you have to select and trade the securities you want to invest in yourself. This is a great option if you’re a knowledgeable investor and comfortable managing your own portfolio.
If you need help investing, you want to choose a more hands-off investment tool, like Wealthsimple for your child’s RESP. It is extremely important that you invest instead of save in your child’s RESP. Investing will provide a higher return on your income, which means more money for your child’s education.
RELATED POST: Self-Directed Investing vs. Robo-Advisor
I initially set up a monthly deposit of $200/mo to my baby’s college fund. You need to contribute at least $2,500 per year to an RESP in order to receive the maximum CESG. I had $2,400 on auto-pilot, so I threw in an extra $100 once to hit the $2,500 for the year.
It was challenging to save on maternity leave. But once I eased back into work and my income went up, I was able to increase my contributions. However, there is a bit of a balancing act where you want to contribute enough to get the maximum CESG, without contributing too much that you hit the $50,000 contribution limit before you can do this! You want to front-load your child’s RESP slightly, but ultimately drag out at least $200/mo contributions for 14.5 years in order to get the maximum government grant money.
As my RESP portfolio began to generate dividends, I reinvested them into more dividend-generating investments. It didn’t take long for the portfolio to start producing over $100/year in income. This continues to increase each month. It will only be a few years before the passive income produced will outpace my contributions to it! By the time she’s in junior high school, I will hit the $50,000 contribution limit. After that, the portfolio will grow by the income it produces alone.
Saving for your baby and you!
Saving for anything takes discipline and time, and your baby’s college fund is no exception. It’s important to remember that every little bit counts. Even if you can only afford to put away $25 per month, it’s still better than $0. And it still qualifies for free grant money!
If for any reason your child does not use their RESP for school, you can collapse the RESP and transfer the money (minus the grants) to your own Registered Retirement Savings Plan (RRSP). Ultimately the RESP is one of the tools available to Canadians to help manage and protect their family’s wealth.
I am trying to do everything I can for my daughter. This is one of the many ways I can help her in the future. I can’t wait to see what she chooses to do and become!
Thank you for this post! I’m still in my baby’s first year and will admit I haven’t opened an RESP. This is a good kick in the butt to get it started.
Thank you for the reminder! My son is 4.5 months and while we did apply for his SIN right away, I haven’t been very good at researching where to open his RESP. Need to get on that pronto!
Do it! Even a bank account is better than nothing, but I would definitely recommend investing with Wealthsimple or Questrade to really make the most of it.
What a great accomplishment in the first year!!
I love the RESP! Our baby was born in May 2018 and you’re right that it takes a while to set it up. Simple broad market ETFs are the best for an RESP. I already invested $2,500 in July 2018, but I have yet to get the $500 from the government.
IMHO the most ideal way to front-load the RESP is to invest $16,500 in year 1 and then $2,500 each year thereafter. It allows the power of compounding the maximum time. The only catch is that it’s a steep goal in one year!
Definitely allows for maximum compounding, but is only appropriate for parents who have already maxed out TFSAs and have significant RRSP savings.
Saving for your child’s education should not come before your own retirement savings!
If you plan on having more kids that will significantly make saving more difficult to reach those numbers. I’m just curious how you would tackle that scenario? Which I would guess most Canadian families encounter.
It depends — if you plan to have more than one child, you can set up a family RESP instead of individual ones for each child and save in one place. Alternatively, if you do have individual RESPs, any unused RESP savings by one child can be transferred to a sibling.
Also, unless you’re having multiples born all at once, your children will probably be spaced a few years apart. This will give you more time to save up for the younger child, since you’ll max out the older child’s savings first.
That said, it definitely is more challenging to save for 2 post-secondary educations than just 1, and how much parents want to contribute (and how many kids they want to have) is totally up to them and what’s best for their family.
Curious what you recommend investment wise when someone is just starting a RESP. Contribution size is so small at the start at only $2500, do you recommend ETFs over stocks until it gets larger?
This article is so timely for me as I just had twins in July. I’m debating over an individual versus family plan. With the family plan, would I still get the grants for two kids?