Few things are completely guaranteed in life to give you a return. A savings account maybe? Nope, you lose to inflation. The equity markets? Over the course of an extended time period, yes, with volatility.
Real estate markets? Over the course of an extended time period, yes, with a lot of borrowed money and sunk maintenance costs.
But there is one, bullet-proof guarantee way that you can make at least 20% on your money, instantly. And get $500 in the process.
If you have a kid, then you need a Registered Education Savings Plan right away.
When the government has to step in and help you, may whatever deity you believe in help you as well. That’s why they created the RESP.
What is an RESP?
Simple. It’s a vehicle (not a savings account despite its name) to grow money in your child(rens) name for all things education related.
The simple premise is that first you put money into it. Then the government puts in a certain amount to help out, up to a maximum. Together, this money is meant to be invested and grow tax-free to be able to afford post-secondary for the child in the future. It could be university, trader school, a fine-arts college, whatever your heart so desires.
Why am I an idiot not to open one?
Here’s the skinny.
You’re allowed a lifetime limit of $50,000 per kid to grow tax-free. Sweet, but who’s got that much laying around? Like I tell my wife, I have the answers…
The savvy people put in $2,500 a year into the RESP and then the good ol’ boys and girls at the Canadian Federal Government put in $500.
Boom! Instant 20% return on your money.
You will not find that anywhere else. Anyone that promises you that, like this guy for this condo, is full of merde. Run away.
So what’s the catch then?
The catch is that the government will only give you $500 per year up to a maximum of $7,200. This equals 14.4 years worth of help from them. Then it’s up to you to continue putting money into the RESP.
By then you’ll have $2,500 x 14.4 = $36,000 + $7,200 = $43,200 not counting any growth you’ve experienced.
There are also more bonuses if you live in Saskatchewan, or Quebec, obviously. These provinces give an extra $250 per year. That’s a 30% return on your money. OMG.
So how do I open one up?
First, your kid needs a social insurance number.
Get this done as soon as that thing pops out of the womb. Then you have to figure out what kind of plan you want to pursue.
The best is having a self-directed RESP. Self directed meaning one that you manage yourself.
You can open it up at your bank’s online investment arm (RBC Direct Investing, TD Investing, Scotia iTrade, etc..). Because the time horizon on this is 18+ years, you want to be invested in growth assets, like some juicy ETF’s that have hundreds of companies spanning US, Canadian, European and International markets. Most doofuses won't do this and just go to their bank and let their salesmen guide them while us bank shareholders continue to make a killing.
Why do self-directed?
For example, when parents buy baby food, diapers, and accessories from Johnson & Johnson, Proctor and Gamble, Nestle and shop Costco with their Mastercard, you’re making money as a shareholder of those companies. How do you become a shareholder? Spread that money into investments.
Some places to park that cash include:
XIN, which is an ETF that holds the largest international companies. Nestle, Vodafone, Virgin, Barclays, BMW, etc..
XSP, which is an ETF that holds the largest 500 US companies listed on the S&P 500. Apple, Google, Visa, Mastercard, Costco, etc..
XIU, which is an ETF that holds the largest Canadian companies listed on the TSX. You know, the Suncor's, the Encana, Royal Bank, CIBC, Goldcorp, Potash, etc...
These would be good places to look to start. And remember, there is only “Doing” and “Not Doing”, there is no “’Try”.
Plenty of websites offer ideas on how to structure a mini portfolio, and it’s something I will get into in a future post. You can't go wrong putting any plan into action though. Just don't put it into a penny stock recommended to you by a brother-in-law.
What about fees?
If you go to your bank and open one up like 95% of people do for RESP’s and TFSA’s, the teller will send you to one of their commission salespeople. They will then try to sell you on a mutual fund that returns X% blablabla and they charge you a commission and management fee.
Remember this: If someone offers you a product (like a bank teller), you’re paying extra for it. If you purchase it yourself (like a self-directed plan) then you avoid those commissions and trailer fees.
What if my kid(s) become rockstars or NHLers and don’t end up in college?
You will have to pay back the federal grant portion (the $500 per year up to $7,200) that the Feds gave you.
The rest of the money that you put in and extra earned as an investment return can be transferred to an RRSP (up to a maximum amount of $50,000).
If you don’t have the RRSP room, then you have to start pulling money out and you will be taxed on it at your marginal rate. Bummer – but if your kid becomes a rockstar or NHLer, who cares.
The bottom line is this.
If you have a kid, open an RESP and put it as much money up to $2,500 a year that you can. The government does not give away free money to the middle class often, so take it! You won't have to worry about these types of headlines in the future because your kids will have mo' money and less problems:
"Students must work 3 times the hours to pay for skyrocketing tuition"
-Global News, April 15/2014
And there, my friends, is your guaranteed 20% return for 14.4 years. Is it sexier than a condo showhome? F*** yeah.
If you made it to the end, like 81% of regulars that log on to this site take a look here..For some extra light reading on the RESP, check this site out.
And for some medium reading on the mechanics of it, check this site out.