Canadian Personal Finance Blog

Archive for May 19th, 2005

Let’s do a real world calculation for you parents out there about the power of compound interest and RESPs for your child’s post-secondary education.

We have a new son, and if every year until he is 18, I put $1000 into an RESP which is made up of really boring interest bearing stuff, that grows at about 4% a year (you should be able to do better, but let’s be conservative), how much money will there be at age 18?

• For every contribution yearly up to $2000 the government kicks in 20% as a payment! Up to a maximum of $7200.00 for the entire program
• This is compound interest we are talking here

Year 1: $1000 + $200 grant = $1200.00
Year 2: $1200 + $48 interest + $1000 + $200 grant = $2448.00
Year 3: $2448 + $98 interest + $1000 + $200 grant = $3746.00
So in 3 years so far we are almost $750.00 ahead of the game!

At 18 years our grand total is: $30,774.50 (using the Excel FV function that is what I get)
Not bad eh?

Now when your child starts taking money out when they go to school, remember they are only taxed on the GROWTH in the fund (not the original money, or the grant money added). Your kids are taxed at a much lower rate at school as well (and they get to write off their tuition costs too).

Conclusion: Yes this isn’t enough, but it is a good start to things, so GET STARTED!!!