Do you have a family? Are you wondering how you’re going to pay for a college education?
Many folks are budgeting for basic needs, such as food and utilities. Yet for many, being able to help your children get a top-notch education is also a priority.
Here are some of our favorite tips on how to budget your money for your child’s education.
Registered Education Savings Plans
Registered Education Savings Plans (RESPs) allows Canadian parents to begin saving. This can happen as early as birth. The government will pitch in for some of it.
Government matching applies to the first $2,500 per year and gets capped at a maximum of $7,500. Parents or guardians can set these accounts up at a bank or credit union.
Once your child is in college, they will receive educational assistance payments. If your child chooses not to attend college, the money will get returned to the contributor tax-free.
A benefit of Registered Education Savings Plans plans is that they provide strong incentives to invest. Parents won’t be paying taxes on the money initially, so they will have an extra incentive to save for their child’s tuition.
Plans like these can often be used to pay for a number of college-related expenses. These may include tuition, room and board, and books and materials.
If, however, your child chooses not to attend college or trade school within 36 years of the RESP account getting opened, the government can ask for their contribution back.
Contributing to an RESP
You’ll want to contribute a minimum of $2,500 per year, or $208.33 per month, to your child’s RESP. This will allow you to get the maximum government contribution of $7,200.
For many folks, this can seem intimidating initially. However, it’s a lot more intelligent to budget now rather than wait until your child is about to go to college and wonder how you’re going to make payments.
Your bank or credit union may allow you to make electronic payments to your child’s savings accounts. If you’re not great with budgeting, this can help force you to make better financial decisions. The money will be coming out of your paycheck each month no matter what, so you’ll need to make your spending decisions based on a smaller amount of income.
You can also ask relatives and friends to contribute to the RESP in lieu of gifts. As birthdays and graduations arise, you can feel comfortable asking for a contribution.
There is no limit to the number of plans you can establish for a single RESP beneficiary. However, they must be connected by either blood or adoption to the person opening the account for a family plan.
Choosing the Right RESP
There are a number of options when it comes to an RESP. It’s an important decision, and you’ll want to be sure you’re choosing the right account for your family.
You’ll want to find out what kinds of incentives are available, as well as what kinds of RESPs are offered. Family plans, for example, help you save for more than one dependent in the same family. Individual plans can help you save for one child, and group plans can help you contribute to accounts for multiple children born during the same year.
You may also wish to inquire about the Canada Learning Bond and if your RESP offers it. This is an initial $500 offered by the Canadian government to help you set up an account. It’s also possible for your child to get an additional $100 per year until they turn 15.
You should also ask about the Canada Education Savings Grant. This will add 20% to the first $2,500 you contribute to an RESP. It’s designed to incentivize saving for your child’s education early on.
It’s also important to inquire about the fees you’ll be responsible for once you open your account. For example, you may need to pay to open the account or withdraw money. There may also be additional fees for account management, services, or commission.
Make sure you ask a lot of questions and take all factors into account before deciding on an RESP. You’re starting off by making a good decision, and you’ll want to make sure you’re maxing out on all of the benefits possible.
Using an RESP
Once your child has graduated from high school and enrolled in a post-secondary institution that qualified, you can begin making requests for withdrawals. The funds can be used for tuition and fees, as well as books and transportation.
Your RESP provider will likely look for proof of enrollment before you begin withdrawing funds. You may also be required to produce receipts as proof of school purchases.
During the first 13 weeks that the beneficiary is enrolled in a post-secondary institution, you will get limited to a withdrawal of $5,000. After that, you won’t get limited unless they don’t re-enroll in a qualifying program.
It’s also possible to withdraw additional funds under special circumstances. You can also use the account to fund an education outside of Canada.
Tax-Free Savings Account
Another way Canadian parents can save for their child’s education is a Tax-Free Savings Account or TFSA. These get created using after-tax dollars. And growth and income can also be tax-free as long as certain rules get followed.
Money from a TFSA can get withdrawn at any time. You will not have to pay any taxes or penalties on the withdrawals.
Because of the lack of taxes on growth, a TFSA provides a wonderful opportunity to save for your child’s education. If your child decides not to attend college, you can give them the funds to open a TFSA in their own name.
It’s also possible to use a TFSA to help your child save for other goals, such as a wedding or a downpayment on a house. You can also use one to save for your retirement or your parents’ healthcare.
Using a TFSA to save is particularly smart if you aren’t sure if your child is going to choose to attend a college or university. Whatever you save and earn will be tax-free, but it can also get used by your child for other expenses once they come of age. You can contribute monthly knowing that whatever you earn will get put to good use.
The American equivalent of a TSFA is a Roth IRA, which also has certain restrictions. With a TSFA, you are not allowed to contribute more than $6,000 per year.
It’s also possible to open a custodial account on behalf of your child or grandchild. With these, a bank or trust company will make investment decisions on behalf of the contributor.
If you don’t tend to handle money well or are looking for help with financial decisions, they offer another way for you to make monthly contributions.
Tweaking Your Budget For College Savings
Making monthly contributions to a college savings account is the smartest and most proactive way to save for your child’s college education. Yet your budget may not currently allow for an extra two hundred dollars in obligations each month.
Making small sacrifices now can help you avoid real financial problems in the future. A basic budget, for example, means that you start a spreadsheet where you keep track of your income in one column and your expenses in the other. Make sure to add your monthly contribution to college savings to the bill column.
When tracking expenses, many folks realize there are ways they can cut back. For example, making your coffee instead of buying it every day can save you up to $1,500 per year. You can also save money by cooking at home more often instead of getting takeout.
When it comes to groceries, there are a lot of ways to save if you’re careful. You can clip coupons, which is now easier than ever thanks to digital couponing. You can also plan your weekly meals based on what is on sale at your local supermarket.
Choosing streaming services over cable is also a great way to cut back on monthly expenses. If you do your research, you won’t have to miss out on any of your favorite programmings. You can also shop around for a less expensive cell phone provider.
In addition, some folks save money by driving only used cars. You can also purchase things like clothes and furniture second-hand.
Finding less expensive means to meet your monthly needs may seem overwhelming at first. However, once you’ve found some options you like, it will seem like second nature. And you’ll be contributing to your child’s future at the same time!
Funding a College Education
Many parents believe that a college education is the best way to ensure that their child’s future will be profitable. With some careful planning, you’ll have enough saved for a worry-free future.
Don’t stop getting smart about your finances now. For more great advice, read our blog today.