Some parents are fortunate enough to be in a financial position where they do not have to work too hard at growing and maintaining their child’s college fund. For the large majority of parents though, saving for their child’s higher education is a serious concern that they must always keep at the back of their minds.
It’s true that no one has seen the future, which is all the more reason to save up for our children, given the uncertain future that they might have to grow up in otherwise. Financial security should take precedence above all else, and that’s not easy to maintain without a professional education these days. Thankfully, nearly anyone can assure better education for their children, provided they start investing early and wisely. If you can relate to that idea, read on, as we elaborate on a few financial suggestions that could change the future of your children forever.
Open a Registered Education Savings Plan (RESP) Account
Most of the readers are likely familiar with the term RESP, especially since we are addressing parents here. A Registered Education Savings Plan or RESP is a regulated account with unique tax advantages assigned to it by the Canadian government. As long as the funds in an RESP are used to pay for higher education, all investment gains made from those funds will be 100% exempt from taxation. As should be easy to imagine, this can be a huge advantage to have on your side when you are trying to build a fund that will be big enough to secure the future of your child’s education, even after keeping possible inflation rates in mind.
Funds from an RESP account can be invested and reinvested in various ways to maximize the tax advantage, but you will still need to have a clear and financially sound plan of action, in order to make it really count. Wealthsimple explains exactly how does an RESP work, what are the various types of RESPs, and most importantly, how to make the most out of those tax advantaged dollars. Being a financial company that prides itself on always putting the human element first, you will also find immediate guidance from one of their many financial experts, to help you with your specific queries regarding RESP accounts and other investments.
Make RESP Transfers Automatic
If you are thinking about what the point of doing so would be, then you might be surprised at how effective this little tip proves itself to be further down the line. Irrespective of our resolutions and immediate circumstances, we often end up making financial decisions that we come to regret later in life. By ensuring that at least some money is being added to the RESP account on a monthly basis, parents can reduce their chances of skipping out on saving money for their son or daughter’s future.
It may sound like an unlikely scenario to many parents, and it might very well be so, but situations change and even the most financially conscious people end up making momentary decisions that they should not, or rather would not make under normal circumstances. All you need to do is decide on the minimum amount that you can afford to put in the RESP account every month for the foreseeable future.
You can always add more every month, but even if you cannot transfer money to the RESP account for some months, the auto transfers will continue, ensuring the fund’s non-stop growth. This will also play a psychological role, helping parents who tend to overspend keep their expenses in check. The little transfers will act as a reminder of financial duties that they should be focusing on, instead of spending it all.
Make Small Lifestyle Changes
Lifestyle changes are easy to suggest but much harder to carry out in real life, especially if those changes need to be quite drastic. This is precisely why we suggest not attempting to make drastic changes since people who take the drastic route usually end up back on their original path of overextending themselves financially, sooner or later. Therefore, if you wish to make lifestyle changes, they need to be small in the beginning and gradual with time. Don’t turn yourself into a hermit though, just cut back on unnecessary expenses as best you can.
Set Up a Trust Fund
Not always a viable option for the average Canadian, but certainly an option worth considering if you happen to be in possession of wealth at the moment. Of course, it won’t have the tax advantages of an RESP account and consequent investment gains from RESP funds, but for managing sizable fortunes, it is an option worth considering.
There are various types of trust funds and only a financial advisor can guide you with opening and managing a trust fund in the best possible way of securing the future education of your children. Trust funds can ensure that:
- Even if the parents end up losing their wealthy status down the line, the money in that fund will stay protected for the future of their children
- In case one or both parents perish, the future of the children’s education will stay secured, along with the trust fund
- Strict stipulations can be added to trust funds, ensuring that the children will only receive the money, during and after completing the specified educational qualifications
Strict stipulations can also be added to make sure the children never receive their money directly until they have completed their specified education. At the same time, a trustee will make sure that the funds are used to facilitate the student in completing all the mentioned educational qualifications if they choose to do so. If you are worried that your children might be thinking about giving up on their education a bit too soon, or if they are ignoring the need to pursue higher education after school, trust funds are a proven way to keep them incentivized against doing so. Fortunes can be fleeting, especially when in the hand of young individuals without the proper knowledge or experience to handle them with the financial tact it needs.
Life Insurance: Preparing for the Worst
Life and wealth are similar in their unpredictability, but life insurance provides peace of mind to parents about situations beyond their own control. If one or both parents suffer an untimely death, life insurance money can make sure that their children’s futures are financially protected, even if they are not there to do so. Admittedly, this is not the most education-centric investment to make, as there is no guarantee that education is exactly what that money will be used for. Nevertheless, it does offer at least some degree of immediate financial security to children who have just lost one or both of their parents.
On the other hand, even life insurance policies can become somewhat more education-centric if there is more than just one policy. An additional policy could be taken, which will only mature and be available to the nominee after they reach their college age. Once again, there is no guarantee that the survivor will be using the funds for education, but it still has a better chance of being used for a professional degree at that point.
Under no circumstances are life insurance investments anywhere close to being as potent in ensuring your child’s higher education via RESP funds. Consider life insurance to be an additional precaution, rather than being the main strategy in this respect. Besides, life insurance policies can get very expensive down the line, making them a low-value proposition in any case.
Above all else and even before thinking about making investments in your children’s’ college education, it is important to make the necessary calculations first. For example, if you have a daughter who is only 2 now, have you considered how much it would cost to put her through a decent college 16 years in the future? While nothing is for certain, inflation rates can be estimated, and financial plans should only be made in accordance with such estimations in mind.
Not only will the price of higher education in most fields rise significantly after 16 years, the value of the Canadian dollar will also depreciate. For example, let’s consider a situation where a couple was determined to build a college fund worth CA$100,000 for their daughter’s college degree and expenses by 2020. However, if they started saving up for the college fund in 2005, then they would have had to target roughly CA$127,000 for the fund to be worth CA$100,000 in 2020. This is because the cumulative inflation rate for the Canadian dollar turned out to be 26.77% between 2005 and 2020.
Of course, they could not have predicted the future, and their calculations could not possibly have been as accurate as those we can make it in hindsight. Nevertheless, it was still possible for financial experts to make a predictive model for upcoming inflations, so as to provide them with close estimations. Today, however, such predictive models have become significantly more accurate, thanks to advancements made in predictive software resources, as well as having a much larger pool of data to base predictions on.