Smart saving tips for parents

There’s nothing wrong with parents wanting to help their kids.

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by Bruce Sellery
December 21st, 2012

Online only.

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baby4_322

Question

My son is two months old and I want to open an RESP for him. I also want to open a separate non-RESP account to help him save for big-ticket items, like a wedding or a down payment on a house. And finally, my husband and I want to invest $500 a month to start saving for our retirement. Where we should start investing our money?

Answer

Hooray for the RESP. You definitely want to open an RESP for your son. He’s going to need big bucks to pay for his post-secondary education in 18 years. Plus the juicy 20% government grant is the best guaranteed return out there.

But boo for the big-ticket items account. I have a three-year-old and of course I would like to be able to give her a splashy wedding and help her buy her first home. But you need to get your priorities straight. So much of parenting requires you to be selfless, but when it comes to saving for your son as adult, you’re better off being selfish.

First things first: Your retirement

You listed retirement savings as your third priority, after the RESP and the big-ticket account. This is a big mistake. You have put your wants (wedding or house) before your needs (putting food in your fridge when you’re 80-years-old) and you just don’t have the flexibility to do that.

I see the “offspring first” behaviour a lot and it breaks my heart. I talked with one woman recently who withdrew $2,000 from her retirement savings to buy her 22-year-old son a couch. A couch! One she might have to sleep on some day because she doesn’t have enough money for a place of her own.

It is one thing to save for a child’s education. He doesn’t have the ability as a toddler or a teen to earn what you can. Plus the government grant makes the RESP really compelling. But saving for an adult’s home down payment instead of your own retirement makes no sense. You do not have a financial obligation to him as an adult, either practically or morally.

You won’t get far on $500 a month

It sounds like you’re unclear as to how much money it is going to take for you to retire. I don’t have any details on your other assets, pensions, or how much your lifestyle costs you. But I can tell you that saving $500 a month between the two of you isn’t going to add up to as much as you might think. You’ll have just $570,000 saved in 35 years time, which would only be enough to support you if you made about $29,000 combined in your final year of work. This is based on [the rule of thumb that you need 20 times your earnings to provide sufficient income to last you from the day you stop working until the day you die. The $570,000 number might seem like a lot, but it really isn’t.

The first thing I would do is to take a step back and look at your retirement plan. Find out how much will you need to save to retire. That will give you some sense as to how far off that $500 actually is.

Make the most of your RESPs

The 20% government grant is worth up to $500 per year. To maximize the RESP you’ll want to deposit $2,500 per year into the account. That works out to just over $200 per month and half of that amount could come from the $100 Universal Child Care Benefit cheque that you’ll receive every month.

You’ll want to make sure that the RESP money is invested in a simple, low-cost vehicle such as a low-cost mutual fund or an exchange traded fund. Click here for my recommendation of an ETF for an RESP.

You love your son. And I love that you love your son. But do everyone a favour and balance that love with prudent action that won’t leave him with the burden of supporting you in your old age.

ask@moneysense.ca

5 comments on “Smart saving tips for parents

  1. Great advice Bruce but I would recommend the couple increase their mortgage payments (assuming they have a mortgage) by $500 a month instead of saving for retirement. They will save tens of thousands in interest costs and pay off their house years sooner.

    Once the mortgage is paid off they will have significant amount of cash left over each month to invest. They could even borrow against their house to invest in solid blue chip stocks that pay dividends. The interest paid on investment loans is tax deductible, not the case with mortgage loans.

    The couple should also open a TFSA and buy one of the major Canadian banks to learn about investing, dividends, and how DRIP's work. Think of this exercise purely as a learning experience b/c learning about investing takes time and effort but it's not impossible. Hopefully they can pass this knowledge on to their son; he just might be able to pay for his wedding from the dividends he receives from his investments.

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  2. I agree with having an RRSP, paying down your mortgage faster to save the interest but there is also another way you can help your children and that is to help them get into home ownership buy either giving them a 2nd mortgage at the same rate as their first mortgage and this would bring them into a conventional mortgage situation to save them high ratio insurance fees. The interest rate although lower than most 2nd mortgage rates would still be more interest than the parents would make by investing at a bank. ADVICE: make sure your children are credit worthy BEFORE you do this.

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  3. Hey, 20% is pretty solid… why don't more parents take advantage of it?

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  4. thanks for sharing this tips on how to save tips as parents in a smart way.

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  5. Thanks for giving this type of tips, now a days every parents want to save the money for their baby. Its a very important thing for the parents and the baby, if somebody save the money from the beginning it will help for the baby in future like at the time of study or any higher education. Most parents thinks how the baby settle their life in future so they save something for the baby and its very useful for the baby, for the saving they also contact with some banks or any other agency.

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