Having children obviously has a tremendous impact on a person’s life and, perhaps also not surprisingly, changes the financial planning priorities of a young family.
Up until a child joins the family, most couples focus on eliminating debts, saving a little bit of a nest egg, and either putting aside some money to buy a home or paying down a mortgage.
But once children enter the picture, having enough money for post-secondary education – primarily through an RESP – should become the priority, financial experts say, outweighing things like retirement planning.
Under the registered education savings plan, money can accumulate tax-free until the time that it's withdrawn and the government will provide a 20 per cent grant, to a maximum of $500, for each contribution up to $2,500 each year. Parents can contribute more than that amount to a plan, but will not receive additional funds from the government.
As much as $50,000 can be put into an RESP per child as they grow up.
The money can also be invested in any number of ways – from stocks to bonds — until it is withdrawn when a child attends college or university.
"There’s a 20 per cent return right there," says Adrian Mastracci, a fee-only portfolio manager with KCM Wealth Management Inc. "It’s hard to pass up."
Children do have to pay income tax on withdrawals from an RESP, but at that point in their lives they are usually in the lowest tax bracket and getting most, if not all, of their money back.
Tuition costs soaring
Putting money aside is vitally important, because average annual tuition rates have increased dramatically over the past 20 years, from $1,271 in 1990 to $5,319 in 2010, according to figures from the Canadian Federation of Students.
Starting early also allows parents to invest more aggressively in equities to reap larger returns and ride out the current market turmoil, says John De Goey, vice-president and associate portfolio manager at Burgeonvest Bick Securities Ltd. in Toronto.
"I don’t think there has been any period in history when stocks didn’t go up over a 16-to-18 year time horizon," he says.
'You’ve got to make your mortgage payments, but it’s good to do a little bit of saving for the retirement.' —Judith Fulton, financial planner
However, as the child reaches the age of 10 or 11 – or if a parent is just beginning an RESP around this age – it is best to begin moving some of that money into more secure investments, because there is less time to make up for any market downturns.
As the child gets ever closer to enrolling in post-secondary education, it’s also important to keep some of those investments in something that can easily be converted to cash, says Mastracci.
Back to mortgage, retirement
With education planning – hopefully — covered, parents then need to think about putting some money away for themselves.
Along with an RESP, lower-income families also receive extra help under Ottawa's Canada Learning Bond program.
Depending on their income, a family can get a one-time $500 bond per a child, as well as an annual grant based on the child's age.
The child must be born after 2003, and be a member of a family receiving the national child benefit supplement, a top-up payment for low-income families.
"You’ve got to make your mortgage payments, but it’s good to do a little bit of saving for the retirement," says Judith Fulton, a financial planner with the Calgary office of T.E. Wealth, "even if it’s a small amount."
Investing early can yield big returns in the long term, thanks to the power of compound interest. And according to the same logic used for the RESP, a longer time frame means you can put some of your retirement savings into a more aggressive investment to aim for higher returns.
It is also important to make sure estate planning is in order and to maintain life, disability and critical illness insurance in the event that something unfortunate happens to one or both parents.
Apart from a worrying about a mortgage, retirement and education – as if that weren’t enough – parents should also continue to budget wisely to keep spending under control and to save as much as possible, De Goey says.
As parents gain seniority in their jobs and their salaries rise, they should re-evaluate their savings strategies. It's easier to take the money from a raise and immediately start funneling it into investments than it is to do it later on when the couple's habits have adjusted to a higher income.
De Goey recommends treating each raise as another savings vehicle. If you are getting by with the smaller salary, simply put most of it away and maintain your current lifestyle, apart from an increase to account for inflation and a small but reasonable addition to your own discretionary income.
There is no doubt that a young family faces a number of conflicting fiscal goals, but it’s really a matter of making the best of what you have to work with, De Goey says.
"We have finite resources and you have to learn to prioritize."