Mistakes Parents Make When Saving For College

educationSupporting a child through college is one of the toughest financial calls for families.

Financial precarity has crippled families given that most households are shouldering mortgages. Governments three years ago funded more than 80 per cent of the operating revenues of universities. Today, a university is barely able to extract 50 per cent of government funding.

That has impacted tuition fees at Canadian universities by three times the inflation rate in 1990. In such times, investing wisely is the only way to beat financial dread. From the get go, families are advised to open RESP savings plans. RESPs were introduced in 1972 by the federal government where generous grants are contributed to help families save for a child’s post-secondary education.

But many ignore the incremental benefits of saving which leads them to make inadvertent errors in judging their financial health for the years to come. Let’s uncover common missteps on the road to saving for post-secondary education.

1. Overly prioritizing retirement savings

It can’t be emphasized enough that retirement savings are crucial; however, not at the cost of saving for your child’s future. It’s important to balance your investment portfolio to suit the financial goals of your family, which is why consulting an investment advisor will put you on a financially-optimized savings path. Soaring education costs hit low-income families more than one can imagine, so saving for a child’s education is not always a feasible option in the face of house mortgages and retirement planning. Yet, a good way to plan savings is to enable your children to participate in the process, where they work part-time jobs and summer gigs over the next 17 years to add to their education fund. Fewer consequences will arise for all families if they worked out methods to distribute the financial burden of saving for RESPs—especially so when the government is giving away free money as 20 per cent of the fund’s contribution.

2. Neglecting savings when times get tough

Today’s economy is as unpredictable as ever with Canadians shockingly within $200 of going bankrupt according to one estimate. In some cases, families chose to postpone savings until they’re financially sound to open an RESP, but it’s worth paying closer attention to a child’s education timelines to ensure you’re not far behind the year they actually enroll in a post-secondary program. Since there’s no limit to contributing to RESP savings plans, families can start small until they can increase the limit to meet their ideal amount sufficiently.

3. Pooling college funds the wrong way

Traditional instruments such as fixed-term bank deposits and stocks come with stagnant growth or high risks for families hopeful of getting steady returns. Registered Education Savings Plans (RESPs) bring reliable savings plans to suit distinct circumstances of families. RESPs prove more beneficial than these ineffective instruments considering the enormous flexibility of such funds to incrementally contribute to a child’s education goals. In Canada, the government can offer up to a $7,200 maximum grant based on parents’ savings for a period of 17 years. The total savings are tax-free while providing compounding value to the principal amount. If you are looking for a reliable RESP provider, many online reviews are favoring Knowledge First Financial as the industry leader.

4. Falling into high-risk investments without full knowledge

Most Canadians are drawn toward stock equities due to the herd mentality of the working class bent in their money-making ways. Highly inadvisable for families, allocating savings to equity can seriously dent your financial health by 20-30 per cent. Rebalance your investment portfolio to apportion a small chunk to equity to put your child first. By scaling down risks, you’re allowing greater room to direct investments to an RESP until the time your child enters university. Consider keeping your money as safe as possible to account for other expenses apart from tuition fees.

5. Not having a tax-free savings account

As a safe bet, families must open at least one tax-free savings account in case they’re reluctant to invest in government bonds and RESPs. Even without an RESP plan, parents can tap into their TFSA room—pegged at an average of $52,000 till your child is university ready—to avoid going into deep debt and disturbing monthly cash flows. Such an investment frees you of any risk, even when your child drops the idea of going to university, since the money stays with you without any rollovers or honoring procedural mandates with other investment options. In another case, if your RESP money isn’t up to the desired limit, your TFSA money can top up shortfalls.

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