vi. Reduce your child's need to work during the school year
I'm a big fan of students working during the summer, but I don't think they should have to work during the school year. Students should be free to work hard in their studies while also participating in sports or social activities.
6 Reasons Not to Start an RESP
RESPs are not for everyone. If you are not in a position to make contributions to an RESP, you should wait before opening one.
Here are some reasons to avoid opening an RESP account:
i. You need to get your finances in order
If you have excessive debts or spend more than you make, you should wait to open an RESP. You might end up cashing in the RESP to pay your bills, defeating the purpose of setting up the RESP in the first place. It is important to get control of your finances and fix the here-and-now before worrying about the future.
ii. Your retirement savings are inadequate
There is no exact amount of retirement savings you should have at any given age, but if you are working full time and don't have any retirement savings, you are not saving enough. The older you are and the less you've saved, the more you should worry about saving for your retirement rather than saving for your child's education. Your child can borrow to pay for her education, but you can't borrow for your retirement.
iii. No extra money in your budget
If your finances are in good order but you don't have any extra money, you obviously can't make RESP contributions. In this case, you might want to consider trimming your budget in order to free up some money for RESP contributions. Another idea is to look at ways to make extra income so that you can save for your child's education.
A great book for money-saving ideas is 397 Ways to Save Money by Kerry Taylor.
iv. Pay-as-they-go educational funding strategy
One common strategy for parents is to pay down all their debts before the child starts school. Once the child starts post-secondary education, there should be lots of extra cash in the budget to pay for education bills. The drawback of this plan is that you don't get any of the juicy RESP grant money.
v. You want your child to pay for part or all of the education
It is reasonable to ask your child to pay for part of her education. The drawback of this plan is that she might end up not going to school or dropping out if the financial burden is too onerous. If the student works part-time during the school year, her grades could be affected. Alternatively, she might graduate with large student debts.
vi. Your children are too old or ineligible for RESP grants
The last year your child can receive a grant in her RESP is the year she turns 17. However, children who are 16 and 17 are only eligible for grants if they meet certain eligibility requirements, which are outlined in Chapter 3: RESP Contributions and Grants. Creating an RESP for a child who is ineligible for the RESP grants has very limited benefits and is likely not worthwhile.
How much should you contribute to an RESP?
The amount you contribute to an RESP is highly dependent on your personal financial circumstances. Here are some things to consider when deciding on your contribution plan.
What are your goals?
Do you want to pay for all of your child's educational costs? Half of them? The more money you want to have available for post-secondary education, the higher the contributions will have to be and the sooner you'll need to start the RESP account.
How many years until they go to school?
If you wait until your children are older to start an RESP account, there will be less time for contributions and investment growth. This means that larger contributions will be required, compared to someone who starts the RESP when the children are young.
How much can you afford?
In order to get the maximum annual RESP grant of $500, you must contribute $2,500 per year or $208.33 per month to the RESP account. The reality is that many people might not be able to spare this much from their budget. My philosophy is that something is infinitely better than nothing, so even if you can only handle $50 per month, you should do it. If your finances improve in the future, you can always increase the monthly contribution. Even if you only contribute $50 per month from when the child is young, that will still add up to a substantial amount by the time the child goes to school.