For many of us, paying for our children’s education is a long-term financial goal. However, with school often so far away, education savings can typically take a back seat to more immediate needs.
Take it from an expert though: whether you’re saving a little or a lot, the most important decision you can make when it comes to education saving and planning is simply starting.
As any parent can attest, time flies. Children have a tendency to grow up in the blink of an eye, and by saving however much you can, when you can, you’ll make sure you don’t get caught scrambling and scrounging to fund their education at the last minute.
So when’s the best time to start saving for your child’s education?
The truth is, starting to save and doing so sooner has a number of benefits. However, it’s important to be mindful of what’s realistic. You want to assess what’s affordable in consideration of your monthly budget. An affordable savings plan is a sustainable savings plan, and that leads to longer-term savings success.
So whether you’re starting to save the moment your child is born or when they learn to drive, you’ll always have to start somewhere, and your current situation will often influence how and how much you can save. There is no true one-size-fits-all approach to financial planning, and unless you’re starting to save a day before your child graduates from post-secondary school, something can always be done to help. Here’s why:
As a concept, compound growth is simple – your money grows faster because interest is calculated on your original investment as well as what it makes over time.
Think of your money as a snowball rolling down a hill: the longer it rolls, the more time it has to accumulate and get exponentially bigger. With compound growth, your savings will typically grow, generating more money that is then added to your total. You then generate even more based off the new total, growing your savings even further, faster.
While it is true that the sooner you start saving, the more your money will typically grow in the long run, saving over a shorter period will often net you more than you otherwise would have had. Moreover, saving even a little over longer time can also have a significant effect.
This brings me to my next point.
The Power of Investing
You want to make your money work for you.
Investing your money wisely can have a massive difference on your child’s education savings.
Depending on your needs and how you do it, investing can typically make a rather significant difference over the long or short term when compared to merely putting your money in a generic savings account.
However, prudent investments are about so much more than just beating the rate of return you can get from a high interest savings account. It’s all about the interplay of risk and return.
If your child is about to head off to university, for instance, it may not make sense to risk everything for a higher rate of return. However, if your child is just starting to crawl, you may be more willing and able to take on more risk to scale your savings quicker and let compound growth do its thing.
At Embark, our plan actually accounts for this by adapting to your child’s age. When your child is younger, it’ll focus on equities and growth, slowly adjusting over time to hold a higher concentration of bonds to preserve your education savings for their post-secondary journey.
This is all to say that deciding to save and how you save can make all the difference when funding your child’s education. Simply taking the time to invest your money in a portfolio that’s representative of your needs and position can typically help you have more for your child’s education.
Tax-free Growth and Government Grants
Another great way to help build out your education savings is by making use of the government grants you’re eligible for.
Through the Canadian Education Savings Grant (CESG), for instance, the government will match 20% of your contributions, giving you $500 each year and $7,200 throughout the lifetime of your RESP, if you take full advantage of it.
Needless to say, fully capitalizing on these grants is much easier when you start saving earlier – you have more time to gradually gain them and keep them invested and growing. However, this doesn’t necessarily mean that you still can’t make use of these fantastic programs later on.
The CESG allows you to carry forward unused grants, increasing the maximum amount you can match in any given year. So long as your child is under the age of 17, you can get something from them.
So What’s Best?
Like I’ve said, saving early can have very real benefits and make the entire process feel smoother. However, something can always be done to strengthen your savings – whether you save a little while on maternity leave and scale up afterwards, or start putting money away the day your child gets accepted into college.
If you ever have questions, or want to map out the best approach for you, we’re always here to help. By booking an appointment today, we’ll see what we can do to help you create your tomorrow.
Chief Compliance Officer
Rick Kenney is an avid marathoner. With over 30 years of experience in the financial and regulatory space, he is passionate about helping families find the best education savings plan for them. A firm believer in continuing education, Rick holds a variety of financial designations, including the CFA, FCSI and Chartered Investment Manager designations.