An Investment in the Future: How to Save for Your Children

21 Nov An Investment in the Future: How to Save for Your Children

In a perfect world, you would start saving for your child’s future immediately, putting away thousands of dollars a year to help your son or daughter get an education or buy their first home.

In the real world, however, chances are pretty good that when your son or daughter were toddlers, you were too busy paying down your own mortgage or student loans to set aside money for your children. Or maybe you were just too busy paying the bills.

Whatever the circumstances, it’s never too late to start saving – and strategies vary depending on how old your kids are.

For very young children:

Before you start looking into RESPs and TFSAs for your children, make sure you have taken care of your own financial needs first. Are you already comfortably paying off your mortgage or saving for a down payment? Are you covering your bills adequately? Are you saving for yourself, for your emergency fund, and for your retirement?

If so, you can open a Registered Education Savings Plan (RESP) account for your baby or toddler. An RESP allows you to set aside money for education after high school. Do it even if you can only spare a small amount ($50-$100 per month), since the money is either taxed at a very low rate or can be withdrawn tax-free when it’s time for university. Although there is no tax deduction for the parent who makes an RESP contribution, the child will receive a Canada Education Savings Grant (CESG) of 20% on contributions of up to $2500 per year, per child.

RESP money can be invested in a variety of ways, but often the investments need to change over time. When your children are very young, put more of the money in equities since time is on your side.

For school-aged children:

If you haven’t opened an RESP yet, reconsider it now. You can catch up on RESP contributions and receive the CESG grants as well – which means if you open an RESP when your child is 8 or 10 years old, you can probably still maximize the CESG.

In addition, this is a good time for your children to begin to learn how to behave responsibly with money. Many parents begin to give their children an allowance around this time. They should also hear your conversations about money so they can learn good financial habits.

For teenagers:

If you have a young teenager, it’s still a good idea to open an RESP if you haven’t done so yet. You can do some catching up for years you missed, and you can still benefit from the CESG as well. However, by this point, it’s a good idea to move those investments away from equities and into something less volatile.

Talk to your children about your plans for financing their education. Make sure they understand what you’re planning to cover and what you won’t cover. Stand firm on that plan even once your child begins university. You don’t want to jeopardize your own retirement savings because you gave more than you planned.

Encourage your teenager to find a part-time job so they learn about living off a paycheque. If you’ve already spoken about good financial habits, this is an opportunity to learn firsthand about taxes and living within your means. This paycheque can also be a springboard to saving for a portion of their expenses during their university years.

When your child turns 18, open a Tax Free Savings Account (TFSA) as well. Unlike the RESP, which requires proof of enrolment in order to use the money, a TFSA can be used to fund a variety of opportunities for your child.

For everyone:

If you are able and willing, purchase an insurance policy for your child. Most young adults – newly independent and not yet burdened with a family to care for – are not adequately insured. Many are gig or contract workers who have no work-sponsored insurance coverage to protect them. Purchasing an insurance policy – whether disability, critical illness, or life insurance – can be an affordable but extremely valuable gift.

To learn more about preparing your estate, contact us.

Joel Rose

With over 35 years of experience, Joel Rose helps families – and their businesses – to prepare for the future. He offers guidance and support to help his clients create estate plans and succession plans that meet the needs of the whole family. Through his extensive professional and personal experience, Joel is known for his compassion and his ability to find a creative solution to meet each family’s needs.