Another blast from the past (2005), remember the numbers may be incorrect, and you should put in $1250 now (given the limit is now $2500 per year)
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
2nd Year: $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?
The True Power of Compound Interest
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!!!
I did the comparison of, given $1000 and only 1 thing I can do with it, should I contribute to RRSP, RESP, or pay down debt. It appears that the best solution is to do the RRSP contribution as I get an immediate 30% return via taxes. Any thoughts?
RRSP’s are good, but DEBT pay down is highly underrated. What is the interest rate you are paying on your debt is the question to ask. How much money will you save by paying down your debt? (check out my archives for my comparisons).
I think the order is DEBT, RRSP and then RESP, but that is my opinion and what works for me.