The month of November was ‘Financial Literacy Month’, and after an introduction to some key family budgeting ideas from Interac, I spent the entire month thinking.
Adding a baby is expensive, and doing so while going through emotional and physical change can be even harder. The stress that comes with managing your family finances shouldn’t take away from your memories and bliss. We’re not going to preach about the percentage you should spend on housing or food, just give you a few ideas on how to be fiscally smart.
1. Take advantage of Canada’s Benefits. The Canada Child Tax Benefit is based on your family income, and all may apply.
Most people say RESPs are the way to go in terms of saving for your child’s education, but that’s not necessarily the case. In fact, there are many different ways to save for your child’s education and RESPs are just one of the vehicles. My answer to the question is always, “It depends.” It depends on how much money you want to put away, what expenses you currently have, how much free cash you have on a monthly basis, what tax bracket you’re in … and the list goes on. Here are some options for you to save money for your child’s education:
(1) Registered Education Savings Plans: RESPs are a great way to save for your child’s education. You get a grant from the government (anywhere from 20% up to 40% depending on your tax bracket) that automatically adds to your contributions and you also get tax deferred growth. Plus, when your children go to school, they’re the ones getting
taxed – at a much lower rate than you would. Make sure that you pick a personal RESP. This allows you to control the money and how it gets invested, plus you can stop and start your contributions along the way without being penalized.
(2) Making contributions to a spousal RRSP: If you stay at home and look after the kids, your spouse can make contributions in your name. This could result in an even higher return on your taxes than the grant money you would get from the government. When it comes time for the kids to go to school, you could withdraw the money in your name at a lower tax bracket. Plus, if they didn’t go to school, you wouldn’t lose the tax credit that you got along the way, unlike RESPs, which require you to return all of the grant money if your child doesn’t go to a qualifying institution.
(3) Life Insurance policy for your child: Universal Life policies have an insurance component and an investment component to them. Not only is your child covered in the event of a tragedy, you have access to the money that builds up in these policies (tax deferred) for anything you want – not just education. In addition, you can ensure that your child can get up to $900,000 more insurance coverage over their lifetime.
(4) Invest in your child’s name: If you put money into your child’s name and the investment generates capital gains, the income is attributed to your child. (Dividends and income come back to you.) This money would be taxed yearly, but at a minimal rate at most. This allows you to have money that is free of any “government strings” requiring your child to go to a specific institution. Plus, it can be used at any time, without worry of tax implications. Buy a car for a 16th birthday, go on a trip to Disneyland, pay for braces, whatever you like.
(5) Savings account: Get your child saving money for his own education. It will let them feel a part of the process and get them started on developing good financial habits.
There are many different ways that you can save for your child’s education.
What’s best for you? That depends.
– Ryan Douglas CFP.