This post is part of the Big RESP Series. See the entire series here.
See the previous post on How To Get Started.
Since the government started giving grants for RESP contributions in 1998, the RESP program has become quite well known and has become a new source of stress for new parents. I know a lot of friends who have set up RESPs for their kids which is great since most of my friends are older parents and have reasonably good finances. For someone who is younger and/or doesn’t have great finances, RESPs should probably be a lower priority to things like lowering debt and saving for retirement. It’s important to make sure your own finances are in good shape before saving for a future expense when you don’t know how much that future expense will be or if it will even occur. There is no point in making RESP contributions and then later on you have to withdraw the money to pay for the mortgage.
Try not to listen to the hype from investment companies – the same people who write the ads that try to scare you into investing with their company (you need 70+% of your income to retire or you will be living in a cardboard box) also create the ads for RESPs. Investment companies often come up with fairly “worst case” scenarios for their projections of how much post secondary education will cost in 18 years or so. They try to make it sound like your child’s education will cost a certain large amount and if you don’t have that much saved up when they finish high school then they won’t be able to go on to post secondary school.
The reality is that most parents (hopefully not me) are still working when their kids go to school so they always have the option of diverting some of their income to make up any shortfall. The investment company ads also don’t seem to include the fact that most students work during summers and can offset a portion of their schooling that way. The last point I want to mention here is that like most things in life, post-secondary education involves choices that cost more or less money. If a student can live at home and go to school, that is much cheaper than going to school in a different city. The student may not like that choice but sometimes money (or lack of) can help simplify the decision making. Other factors that I can think of are housing – do they live in a dorm, shared accommodation or their own apartment? Do they have a car? All these choices will play a significant role in the amount of money required for the students education.
RESPs are a good thing but they are not as important as your family finances. You are not doing the child any favours by maxing out the RESP grants but they can’t participate in some activites because you don’t have enough money.
Establish your family finances first, then worry about the RESPs. You can carry forward the contribution room so there is no rush to start the account as soon as the child is born.