Warren's Mortgage Monthly Vol. 62 - September 2018
Good afternoon all,
Hope this update finds you all well and rested after this beautiful (and hot) summer!
Hard to believe we are approaching the days of Pumpkin Spice Lattes, colorful leaves and back to school. Both of my little ones start full time this year and my partner returns to work after an 18 month parental leave. MANY changes in our little household, lots of emotions and much planning for the future. In my last monthly update, I mentioned I would focus on one of the more popular topics I was asked about, that being RESPs. Naturally with today being the first day back for many, I thought it an opportune time to relay to you some of the benefits of this Canadian program. (You can also skip right to the end for my Prime Update (Abridged version) below….
Registered EducationSavings Plan - RESP
We can all agree that free money is a good thing and the RESP could be the most lucrative program currently on offer to Canadians with kids!
Every dollar contributed (up to $2,500 in a calendar year) will receive a 20% Canada Education Savings Grant (CESG), up to $500 each year. On top of this, the investment income, capital gains and dividends inside an RESP grow tax-free.
There is a lifetime maximum contribution amount of $50,000 per child, however the grant is limited to the first $2,500 in contribution per year. Up to $5,000 in contributions per year can be applied to unused amounts from previous years.
If you have the cash-flow, the best way to maximize the benefit is to start investing at least $2,500 a year ($100 per bi-weekly pay day) as soon as your child is born. This approach will maximize the time value of money and allows for long-term dollar cost averaging.
In the event a child decides not to attend post-secondary, there is great deal of flexibility in terms of what happens to the funds. They can be transferred to another RESP beneficiary, back into the subscriber’s RRSP, donate the earnings to an educational institution etc. etc. (For a full list of requirements seek the counsel of your financial adviser)
Due to the flexibility and relative simplicity of an RESP, I believe they’re a no-brainer for most people.
Canadian full-time undergraduates paid an average $6,373 in tuition fees for the 2016/2017 academic year, according to Statistics Canada. That said, tuition can be a relatively small component of the overall cost when factoring in room, board and books. Professional schools like medicine and dentistry are two to three times that.
From my experience, you’re looking at ~$25,000/year to send one child to university or college – close to $100,000 for four years; when you have multiple children the costs can become quite dramatic! But we haven’t even considered inflation. Unfortunately, education costs are rising faster than inflation. The tuition costs cited by Statistics Canada in 2015/2016 were 2.8% higher than the previous year, which was 3.2% higher than the year before that. And in some provinces, like Ontario, costs rose 4%, or twice the rate of inflation.
If a parent saves $2,500 a year starting at the birth of each child, assuming they could earn a 5% rate of return after fees, the RESP balance could be $86,000 by the time the child reaches age 18.
In researching an investment vehicle to place RESP money for my little ones, I stumbled upon WealthSimple.com, a Canadian based company with over 1.9 Billion dollars in assets under management. Being geared toward the Millennial crowd, WeathSimple’s philosophy centers around ethical, un-complicated and low fee investing. Their charter (https://www.wealthsimple.com/en-ca/culture) boasts many of the same priorities I hold to standard including “Keep It Simple” “Do What’s Right for Each Client” “Take Care of Each Other” and ‘Raise the Bar”. Opening an RESP account for my kids took only a few minutes, was simple and easy to setup and the investment portfolio was tailored to my risk tolerance and timeline. If you are interested in taking a look for yourself, visit https://wealthsimple.com/invite/FF0NMWwhere your first $10,000 is managed for free! They also offer investments under your Tax Free Savings Account, RRSP and other non-registered plans. Word on the street is that they will also roll out a discount stock trading account which could be pretty cool too!
Prime Rate Update (Abridged Version)
The bank of Canada is widely expected to keep rates on hold tomorrow with odds of an increase to Prime hovering at only 10%. That said, the prediction for an increase in October is firming at an 80% chance which supports the notion that if not tomorrow – one more increase is likely on the horizon. Normalization is upon is =)
If you are new to the mortgage monthly news letter firstly welcome, secondly I have started to upload these editions to my blog at www.warrenfetterly.com where you can catch up on previous publications. July’s update was more numerical in nature for those of you who enjoy the economic outline.
I invite everyone to offer up topics of interest you would like to hear about in further updates, always nice to keep it fresh and running with new ideas!
Until next month, be well =)