We often get asking by many young parents in Vancouver, “What’s the best way to save money for kids?”.
There’s a lot to think about, such as how much money is needed for post-secondary education? Which accounts work best for establishing a small nest egg for my child? Should I use TFSA, RRSP, or RESP, or all of them? All of these are valid concerns since the lack of a safety net for children entering the real world may put them under significant mental stress. With the cost of living rising significantly due to inflation and housing prices spiraling out of control, many parents are very worried about their children’s future.
Here are several strategies to help save money for your kids to help them set a strong financial foundation.
How to save money for kids in Vancouver
1. Use tax advantaged accounts
As you begin to set aside money for their education, you may be eligible for a variety of grants and incentives from the federal and provincial governments, as well as a wide range of savings and investment accounts. Here are some examples:
1.1 Registered Education Savings Plan (RESP)
A Registered Education Savings Plan is the most popular vehicle for saving on behalf of young children. An RESP is a tax-advantaged savings plan for parents to help their child pay for post-secondary education costs, such as college or university tuition, room and board, and living expenses.
When a parent contributes to an RESP, there are no tax deductions like RRSP; however, the growth in the account is tax deferred. When the child is ready to use the money for their education, the growth will be taxed based on the child’s income. Given the child will likely in a low income situation, the tax will likely be minimal.
1.11 Canada Education Savings Grant (CESG)
The Canadian Education Savings Grant (CESG) is a grant offered by the Canadian government that is paid straight into a registered education savings plan (RESP). The government offers a 20% CESG on contributions of up to $2,500 annually per kid, resulting in an additional amount of up to $500-$600 per year, depending on the household income level. If you started saving for RESP when your child is over 1 years old, you can catch up on previous year’s of grant by contributing more than $2,500. Each child with a RESP is eligible to receive a lifetime maximum grant of $7,200 before they turn the age of 17. So start saving early to ensure you receive all the eligible grants!
1.12 Canada Learning Bond (CLB)
The CLB offers additional fund to households with annual income below $50,197 in 2022. The Canadian government will put up to $2,000 into your RESP if you meet the requirements. $500 for the first year you qualify and $100 each year you qualify until your child turns age 15
1.13 BC Training and Education Savings Grant (BCTESG)
If you live in Vancouver, British Columbia, the provincial government will also contribute $1,200 of BC Training and Education Savings Grant or BCTESG to an RESP when your kid is 6 years old if you qualify.
1.2 Registered Disability Savings Plans (RDSPs)
For families with children who are eligible for the Disability Tax Credit, Registered Disability Savings Plans (RDSPs) provide a similar savings opportunity to RESPs. The goal of these contributions is long-term financial security for the beneficiary, especially in their old age.
There is no tax deduction for RDSP contributions, and beneficiaries may receive generous government assistance up to the year they reach 49. When you open an RDSP, you also qualify up to $70,000 of Canada Disability Savings Grant (CDSG). If your family net income is below $98,040 in 2022, the government may contribute an additional $3,500 to an RDSP for a mere $1,500 investment!
Canada Disability Savings Bonds (CDSBs) are an option for households with an annual income of less than $49,020 in 2022. These bonds may attract up to an additional $20,000 in government subsidies.
Both parents and grandparents are able to set up RDSPs for their kids and grandchildren.
Like RESP withdrawals, RDSP withdrawals are taxable to the recipient, while the contributions themselves are tax-free when withdrawn.
1.3 Registered Retirement Savings Plans (RRSPs)
Many parents are not aware they can open an RRSP for their kids. As long as they’ve earned income and filed a tax return to earn contribution room. You want to make sure you wait until they filed their first income tax return and do not contribute over the allowed contribution limit. This is a great way to help your kids grow their money in a tax deferred environment.
1.4 Permanent Life Insurance Policies
You can also help your kid establish long-term savings in a permanent life insurance policy. This can be achieved using a Whole Life or Universal Life where the growth inside the insurance policies are tax deferred until withdrawal. There’s an option to borrow against the accumulated cash value instead of withdrawal to avoid income tax. By setting up a permanent insurance policy for your kid, not only you have an additional vehicle to save for them, you are also establishing an insurance benefit for their next generation as well.
2. How much money you should save for kids
There is no universally accepted rule for how much money parents should set aside for their children, but one key rule of thumb is to never jeopardize your own financial plan to provide for your children. Parents may be tempted to postpone retirement savings in order to help their children save for college tuition or a down payment on a home, but it is critical that you have a comfortable financial cushion for yourself first. If you’ve already established a good saving for your own retirement and emergency fund, you can consider your children’s financial security next.
To give you an example, you can set aside 3-5% of your net monthly income. That translates to $180 to $300 per month for a family with a monthly take-home pay of $6,000 after taxes. A savings rate of 3-5% will not make a significant dent in your budget, but it will accumulate into a sum of $70,000 to $117,000 by the time your newborn child turns18 at an average annual return of 6%!
Keep in mind that when it comes time for your child to enroll in college or university, tuition may be much higher than the current average, on top of other expenses, such as the cost of living on campus, transportation, and other necessities such as food, books, and other supplies. These expenses can be covered by additional savings, qualifying for scholarships and bursaries, or income generated from your kid’s part-time work.
When deciding how much of your disposable income to set aside for savings, consider your family income, regular costs, and any existing savings or investments. Even small payments today can add up over time, so it’s worthwhile to contribute as much as you can to tax-advantaged savings accounts each year (like RESPs and TFSAs).
3. Assist them in purchasing their first home in Vancouver
By assisting their children with the down payment on their first home, parents can better ensure their children’s future financial stability. Instead of paying rent, your child could use that money to purchase their own home!
Given that the average home price in Vancouver is currently above $1,250,000, first-time buyers will need a substantial down payment to enter the housing market. The costs of purchasing a home may be prohibitive for recent university graduates or young couples looking to start a family. If they receive a financial boost from their parents’ nest egg for a down payment, they may get a head start on adulthood.
There are many things you can buy for your child, but prioritize those that will provide a stable financial foundation for them in the future. You can help your child avoid debt and begin building long-term wealth by contributing to their education, wedding, or first home purchase.
4. Doing what is right
One of the most important things parents can do to help their children financially is to set a good example. Many people have ideas about what is and is not a good financial strategy, and many rules of thumb have been developed as well. Personal finance decisions are something I care deeply about, and I can’t say what the “best” way to teach kids about money is.
Regardless, it is critical to teach children concepts such as budgeting and delayed gratification, as well as to demonstrate to them that money is not something to be afraid of, but rather something they will need to learn to manage effectively in the real world. You can start by giving them an allowance and teach them the concept of allocating their allowance to different buckets such as fun bucket, emergency bucket, investment bucket, etc.
Children benefit greatly from their parents’ financial discussions. It will influence how they think about and handle money just as much as, if not more than, their peers and online communities. While some schools are beginning to teach students about personal finance, it is still critical that these concepts be taught at home, especially when children are young.