“Buying RESPs” – What Parents Don’t Understand

If you haven’t read any of the RESP articles on this site yet, then you might not know what a huge fan I am of the Registered Education Savings Plan program.  Check out these articles if you want the details of RESPs, but the Coles’ notes version of the program is that these handy little tools are setup by the government as an incentive to get you to save for your child’s education.  In fact, they want to help so much they will give you an automatic 20% return on investment!  There aren’t many places I know off that will guarantee those sort of numbers.  There are is lot of other cool stuff like tax-free growth inside the account, and family plans, in addition to other things.  I think that if you’re a parent these days, you’re doing your children a real injustice by not contributing to a RESP if you can at all afford it.  Even if you aren’t a big fan of university, or don’t think your child might go on to that stream of post-secondary education, you should be aware that RESPs are pretty flexible and cover a wide range of post-secondary options in addition to more common options like university.  For a complete and thorough look at the entire RESP program I recommend checking out Mike Holman’s book on Amazon, it is the only authority in the field that I’m aware of.

Financial Illiteracy Costs Thousands

The problem with how many people use RESPs today is the same one that plagues the use of TFSAs and RRSPs: people just don’t care enough about financial literacy to make full use of the plans.  How many people do you know that continue to use the phrase, “Oh it’s that time of the year again I had better buy some RRSPs.”  That drives me CRAZY!  You cannot buy a tax-advantaged plan!  They are defined buckets that the government allows you to fill with assets of your choice.  Of course the big banks and institutions that set up and market TFSAs, RESPs, and RRSPs know that this is way too confusing to the average consumer that steps into their building and is intimidated by financial terminology and money in general due to the fact they have likely not received any education in that subject area.  I would assume I’d be the same way walking into an architect’s convention, or a Spanish-speaking meeting.  The sole goal in the case of these institutions is to set you up an account with them.  Much of the time whoever is proposing you open an account has part of their compensation coming to them on a commission basis.  Consequently, instead of actually explaining the ins and outs of an RESP to you, the vast majority of bank personnel I’ve seen simply throw out that automatic government match figure of 20%, and then smile as they open up a savings account for you within the RESP.  If they are at least decent at their job it will be a high-interest savings account, and so you will at least get some return on your money.

Keep Your Options Open

This is not an ideal use of an RESP.  Even worse than though, it is sort of a dishonest way of representing the options available.  I honestly believe that in many cases most frontline staff at financial institutions don’t know enough about the savings vehicles available to knowledgeably talk about them to someone else.  The truth is that almost any asset class can go into an RESP and earn money for you once it is in there.  Even that money that the government gives you, you have control over and can invest in almost anything.  GICs, Bonds, Stocks, ETFs, Mutual Funds etc, can all be bought and put in the RESP bucket (up to the yearly limits of course, but that’s getting pretty detailed).  I think that most people would be much better served by starting an RESP earlier in a child’s life and then taking a little more risk through stocks and ETFs (using indexing strategies of course) for at least the first few years before looking at a bond ladder that will have money come due as the student(s) needs it to fund their post-secondary education.

Is learning about this RESP stuff a little complicated?  Sure, but I think if you prefaced the conversation with most parents by saying, “Ok, I’m going to steal an hour of your day here, but in return you’ll actually understand exactly what is going on with the thousands of dollars you’re putting away for little Johnny AND you’ll probably have a whole lot more money in this account than you otherwise would’ve 15 years from now,” I’m going to be most parents would take that bet.  Most parents ignore savings when children are young, only to give students cash when they are actually going to school.  This is the least efficient way of helping your child at university.  Use what the government gives you to your advantage, because *fill in deity here* knows that they won’t hesitate to take as much tax from you and your child as possible in the years to come!