Note: This post applies to Canadian residents. Also note that I am not a financial planner.
Let's talk about saving money for your child's education.
Recently, the Canadian government announced several important tax reforms that will benefit families with children under the age of 18. The changes include income splitting, changes in the maximum families can claim for child care expenses, and an increase to the Universal Child Care Benefit. You can read a brief summary of these changes here.
Let's talk about how you can use the changes in the Universal Child Care Benefit to help save for your child's future.
Currently, the federal government will add 20% to your child's RESP annually, up to a maximum of $2500.00. So - if you put $2500.00 away annually the government will top it up to $3000.00. Let's be honest - saving this much money is not easy. But for many people it is doable, albeit sacrifice will be involved. When you consider that many people are saving for more than one child it seems daunting. The important thing to remember is that any money you are able to sock away is better than no money. Below are three different scenarios envisioned using the Universal Child Care Benefit to help you save.
Under the announced changes, you will receive an additional $60.00 per month per child. If you are able to save that amount alone, you will have $720.00 saved at the end of one year. The RESP top up from the government would bring this to $864.00. If you do this starting now, for the first five years of your child's life, you will have $4320.00 in their RESP (not including compounding interest or investment growth). That is a great start!
You are able to save $100.00 a month (the current amount of the Universal Child Care Benefit) but you need to keep the additional $60.00 to cover child-related expenses. At the end of one year you will have $1200.00 saved. The RESP top up from the government will bring this to $1440.00. If you do this starting now, for the first five years of your child's life, you will have $7200.00 in their RESP (not including compounding interest or investment growth). Fantastic!
You are able to save the entire $160.00 per month (the full new amount of the Universal Child Care Benefit). At the end of the year you will have $1920.00 saved. Imagine, if you will, that through a great deal of planning and sacrifice you are able to top this up yourself with an additional $580.00 - bringing your total contribution to $2500.00. The government top up will then bring this to $3000.00. If you are able to do this for the first five years of your child's life (starting now), you will have $15,000.00 in their RESP (not including compounding interest or investment growth). Amazing!!! If we can forget about the opportunity cost of using up your UCCB for this, you are essentially taking $580.00 and turning it into $3,000.00. Incredible.
Any money that you are able to put away for your child's future is amazing. Anything at all. It is not easy. Just raising a child is expensive. I have talked to many young parents who are overwhelmed by the cost of raising a child in the first year (it is true - so many big expenses!). However, children cost more as they get older, not less (think sports, activities, lessons, clothes, school expenses, etc.). Of course child care is a major expense when kids are young. There are so many things to balance out, which is why it is critical you have a solid financial plan in place. Everyone's plan will look different. The more you can save when your kids are young, the more wiggle room you can give yourself later for expenses such as sports. But don't take my word for it (seriously, don't) - make an appointment to speak with a Certified Financial Planner to discuss how you can maximize the benefit of these new tax reforms for your family.