Recently I razzed a guy for wanting to send his five-year-old to private school when he clearly can’t afford it. I asked why he’s doing it. “Is your kid that special?” He was appalled. Apparently everybody’s child is better than all the others, which makes publicly-funded education innately inferior.
It’s stunning how many parents with dismal retirement or future prospects are willing to fork over $20,000 a year for a private school at the same time they’re paying taxes to support the perfectly good one down the street.
Bonnie just chimed in with this comment:
“You bashed the guy who wants to send his kid to private school even though he can’t really afford it. I would be interested to get your perspective on how to ensure that our kids grow up financially literate and with academic/any type of self-discipline. Many of my parent and teacher friends are pretty disillusioned with the Canadian public school system, both from our own experiences in our growing-up years and what we observe with our kids. It seems like kids are coddled and babysat and are passed up in grades even if they haven’t mastered the knowledge content yet, then they go out in the work world and totally can’t cope. I feel like this is directly related to your many references to how Canadians make poor financial choices. Our school system should be providing us with the emotional and intellectual tools to make clear headed informed decisions about our lives, finances and the world around us, and the system is not doing that for many kids. It’s widely felt that the public school system as it is today is failing kids in these respects. Again, interested in your perspective.”
Hmm. Strikes me in a world where everybody now requires a university degree, seriously delaying adulthood, that where you took Grade 4 is irrelevant. Isn’t it far more beneficial for your little genius to plug into a good university, then exit with no student debt? Or slog through med or dentistry school without having to wait tables at night?
Sure it is. So shelling out $150,000 for a grade school experience that could have been had for free, while failing to amass that amount for post-secondary costs is purely hormonal and myopic. And probably elitist and arrogant. It certainly isn’t in the best interests of the family unit, unless you have wealth – which 99% of us don’t.
This brings us to something a helluva lot more useful for your little monsters: the RESP.
For the past fifteen years the feds have let parents invest for their children in a tax-free environment, and also topped up the accounts annually with free money. This fact alone – a gift equal to 20% of your contribution – should be incentive enough to play. And yet so many people do not, or get involved with the wrong kind of RESP – the ones flogged by the baby-sniffing salesguys who lurk around new moms.
In case you’re hazy, a registered educational savings plan is like a TFSA – a vehicle in which you dump money which is then invested for tax-free growth, but without any deduction from your taxable income (like an RRSP). You’re allowed a lifetime limit of $50,000 per kid, which earns a maximum grant of $7,200. Generally speaking, if you put $2,500 a year into the plan, then the feds will hand over $500. Sweet. Whenever Ottawa gives you money, take it. (There are also extra grants if you live in Alberta or Quebec, which figures.)
When the child goes to university, college or trade school (full or part-time) the money can be withdrawn and is taxable in his or her hands (but only the growth portion – the rest is taxless). If your kid disappoints you by becoming a billionaire rock star, then you can transfer up to $50,000 into your RRSP (subject to certain conditions, like the plan being at least 10 years old) if you have available contribution room.
Or if you have a family RESP, funds can be used by the sibling who does not turn into a rocker or a masseuse. With a family plan, ensure each year you make a contribution that you designate which kid gets what, so the grant money can flow accordingly. By the way, with a family plan, the beneficiary (the monster) can be your child, a grandkid, your sister, or an adopted family member. With an individual plan, however, the beneficiary need not be related to you.
To set this up, the child requires a social insurance number, then you must decide what kind of plan. But that’s easy. Self-directed. Sure, there are lots of pooled funds around, sold by the baby-sniffers, but most of them involve high upfront fees, a limited ability to exit and questionable investment returns. Remember, like a RRSP or a TFSA, this RESP is not a product – it’s just a vehicle into which you place things that grow.
So, a self-directed plan will allow you to fill it up with a nice diversity of growth assets (like the ETFs this blog has described). Don’t fall into the emotional trap of buying GICs because your special little creation needs to be protected with guaranteed investments. If you have at least a decade until the funds will be used, then go for growth, since volatility will be defeated by time. Once you’re a few years away from school needs, the RESP can be converted into a series of no-surprise strip bonds, maturing each September. If you have no idea what I just said, get an advisor to manage this for you.
There are many more rules, but these are the principal points. And given the escalation in the cost of tuition, books, residence and beer, sending your package off to university in the years or decades to come could be financially crippling. The RESP is one way to mitigate that. Or, you could just abstain, and buy a Harley.