Wednesday, February 6, 2013

Financial Math and RESPs

Creative Commons Licensed photo by Flickr user Meddygarnet
One of my favourite areas of math to teach is financial math. I like teaching it for a couple of reasons. The main reason is that it's something that all students will be able to use at some point in their lives, hopefully in the near.  For most students it's the most useful math they will learn in high school. The other big reason that I enjoy it is that you're learning about money. Who doesn't get excited about making money.

Although I like teaching about money, I would say that my students tend to be for a day or two but they loose interest (no pun intended) once things get complicated, abstract or not so relevant. There are lots of calls for improving financial literacy in Ontario. The trouble is that every student in the province gets a taste of financial math (in grade 11) but somehow what they learn doesn't seem to translate to their own lives. This could be because for many students the idea of buying a home, leasing a car or having a credit card seems so far off and so far removed from their day to day lives that it's almost irrelevant.

When I teach the financial components of the courses I cover the curriculum, extend it a little and generally try to make it interesting. Some of my students seem very interested, some mildly amused and others seem to not be interested at all. To add a little excitement we talk a bit about their plans for post secondary education. We talk about how they will pay for it and we talk a little about Registered Education Savings Plans (RESPs). Still not much interest. Maybe financial planning for two years down the road may not be exciting for them.

I've decided to put a quick guide to RESPs here for any of my students who may be interested but also for ALL parents of school aged children (or younger) in Canada.

RESPs, RESPs, RESPs - take advantage of them early

The Canadian government wants to encourage Canadians to save for post secondary education. As such they offer Registered Education Savings Plans (RESPs). To begin an RESP go to the bank, setup an account and then start making contributions (go ahead, do it now, I'll wait). Once you have the account you can begin contributing and saving for your child's education. The best part is that the government provides a grant for money that you contribute. If you contribute up to $2500, the government will kick in 20%. That's an immediate, guaranteed 20% return on investment, leaps and bounds above any other guaranteed investment. Now invest the grant and your contribution to earn even more. You are allowed to invest more than $2500/year but you won't get grant money for contributions beyond the $2500 (unless you're 'catching up'). If you can't contribute the maximum amount some years, you can catch up later by contributing up to $5000/year (if you want to get the maximum grant). If you wait too long you won't be able to get caught up on missed grant money. When the money is withdrawn from the RESP the grant money and the growth is taxed at the child's rate. The principal contributed is not taxed since the contributions were made with after tax dollars.

So the best way to get the most out of an RESP is to contribute the maximum $2500 (per child)/ year. The government will contribute a guaranteed 20% (or $500). Invest your the money and repeat. I know that money is tight and making these contributions can be difficult but the long term gain is huge. It's too good not do. The worst case scenario is that you end up setting aside a little money for your child's future and you've received some grant money from the government to help out. The best case scenario is that the grant money plus the growth over time are enough to pay for school. Your child benefits and you get your contributions back. Hello retirement slush fund!!!!

What are you waiting for? Go open an account now and start contributing $2500/year, or whatever you can. Get caught up later if you need to. Go! Go! Go! Don't wait!

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