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Financial Literacy

Why You Should Start Saving for Your Kids as Early as Possible With an RESP

Barry Choi
Barry Choi

With the cost of continuing education being incredibly high, many parents start saving early for their kids. Not only does this lessen the financial burden on your children, but it also presents a learning opportunity as you can involve them in the saving process.

Parents can start with basic concepts before switching to budgeting. Eventually, you can even educate your kids about financial planning. Everyone will face challenges when saving money, but by presenting money concepts early, you can help ensure your kids are financially responsible as they reach adulthood.

You can take advantage of government incentives

With rising college and university tuition costs, parents could start saving early for their children’s education. The best way to do this is with a Registered Education Savings Plan (RESP).

RESPs are valuable because the government encourages parents to save through the Canada Education Savings Grant (CESG). The CESG matches your annual contributions by 20%, up to $500. To help modest-income families, the government provides a CESG match of up to $600. Regardless of your yearly grant, the lifetime maximum is $7,200 per child.

Besides the CESG, RESPs are valuable because they are tax-deferred accounts. RESP subscribers (those contributing to the account) won’t get a tax break, but any capital gains and interest earned are completely tax-free while the money is in the account. Eventually, when the RESP beneficiary (the child named on the account) withdraws the money, they’ll be taxed at their marginal tax rate. However, since most students have minimal income, their tax burden will likely be low, if anything at all.

Find out how much you can save in 18 years!

You give your investments time to grow

The other reason you’d want to start saving for your child when they’re younger is the power of compound interest. Let’s say you opened an RESP when your child is born and contribute $200 a month. You invest that money and expect an average annual return of 5%. When your child turns 18, they’ll have $75,067 in their account even though you contributed just $43,200. That difference comes from compound interest and the CESG grant.

There is a lifetime RESP contribution limit of $50,000, so if you want to max things out, you’d have to contribute about $231 a month from when your child is born. That would increase the expected amount when they turn 18 to $86,095.

Admittedly, not everyone will be able to max out their child’s RESP each year, but as you can see, there’s a huge benefit to starting early. In addition, you’re allowed to catch up on your CESG up to one previous year. That means if you contributed $5,000 one year, you’d get the CESG for the current year and one prior year.


Give them the gift of choice!

Your kids will be more financially literate

Beyond saving for your child’s future education, saving early can help build financial literacy. One of the easiest ways to do this is through chores and allowance. With chores, you can assign a dollar value to each task. This educates them about the concept of work and the financial rewards you get from it. To make this lesson stick, you can create a chore chart with different values. For example:

  • Taking out the trash – $1
  • Cleaning your room – $5
  • Washing dishes – $3

By assigning different cash values to the tasks, your children will understand that they’ll be rewarded by doing harder or more work.

While earning money is one thing, teaching your kids the value of saving money is just as important. Putting any money earned in a piggy bank is likely good enough if your kids are young. Once a month, you can count the money together to see how much they have saved. Once your kids get older, you’ll want to set them up with a savings account at a bank, as that will introduce them to the financial systems.

No one is suggesting that your kids save every dollar they earn, but by teaching them about saving and compound interest, they’ll be much better off in the long run.

You can integrate financial education into daily life

Your daily decisions can help your children increase their financial education, regardless of age. For example, when grocery shopping, you can show your children how to price compare. You can also explain sales and making budget-conscious decisions. To make things more interactive, you could give your children money and ask them to come up with a healthy meal. This practical exercise will help your kids learn about the importance of budgeting.

Another simple lesson that can be taught at any time is delayed gratification. Explain to your kids that even if they can afford a daily treat, saving that money for something bigger that will have a more meaningful impact, such as a game or toy, might be better. You can also explain how adults need to save for what they want too, such as buying a home or taking a vacation.

Final thoughts

Saving money for your children as early as possible will always be beneficial, especially regarding their continuing education. By investing those funds, you can take advantage of government incentives and give your investments more time to grow. That’s much easier than coming up with a lump sum later in life when money might be tight.

Barry Choi
Written by Barry Choi

Barry Choi is an award-winning personal finance and travel expert. He regularly appears on various shows in Canada and the U.S., where he talks about all things money and travel. His website - Money We Have - attracts thousands of visitors daily, looking for the latest stories on travel and money.