“Will you save enough money for your child, or will they be left out in the cold?”

A common question that parents ask is, “where should I put my money for my child?”

The answer to this is… “it depends.”

Before saving for your child, you need to make sure you also consider your own financial situation.

First, there is affordability. Before you think about what savings program to use, you must ask yourself: How much money can you realistically put aside for your child?

Have you put aside an appropriate amount for your own savings? Emergency fund? Dream vacation? Retirement fund?

Remember, your child could borrow for their future education, but you’ll be hard-pressed to get a loan for your retirement! Under most circumstances, a rich parent will probably not have a poor child.

With all that out of the way, let’s talk about the main places you could consider putting money in for your child.

BANK ACCOUNT

The most common form of saving many parents do is a joint bank account with their child. This is definitely one of the worst options for growing your money over time, but at least it’s liquid so YOU as the parent can spend it all.

RESP

Generally, the most popular pick for parents when they save for their children.

RESP stands for Registered Education Savings Plan. Basically, it let’s you put aside money for your child’s future education, and the government will match 20% of the first $2500 per year up to maximum of $7200.

Not all RESP plans are equal. Make sure you contact me to get the run-down on different kinds of plans. Some companies can give you additional bonuses (ie: more free money!) while others lock you in and force you to pay large penalties if you don’t continue steady contributions. Make sure you are aware of where exactly your money is going into! There are even programs that guarantee you cannot lose your principal, while guaranteeing you growth and bonuses. Let’s talk about your options!

PARTICIPATING WHOLE LIFE INSURANCE

An effective way to grow money in a tax-free way for your child, while still having the flexibility to use the cash however you want, is a participating whole life insurance program for your child. Generally you would look for programs that offer cash values, guaranteed growth, and probably the most important factor- pay in a certain number of years. It’s doubtful that you want to pay into a program until your child becomes an adult, then at age 20, your child tells you “sorry dad, thanks for the insurance, but I’m not going to pay for it. I’d rather buy beer.”

Advantages:

1- At the end of the pay period, your child has permanent life insurance that NEVER EXPIRES, so they don’t have to worry about buying it for themselves. Because they are younger, the cost of insurance is far lower than that of an adult.

2- The cash value in the policy at the end of the period will be at least as much as you put into it (making it at least as good as a bank account with “free” insurance).

3- The cash value will continue to grow tax-free even after you stop paying into the policy. The longer you keep it in there, the more substantial the growth, allowing you to use the cash for a variety of goals. Buy a car? Help pay for university? Down payment on a home? Down payment on a home for the grand-children? Retirement? The cash value can grow into the millions if you keep it in there long enough.

4- You could use it to supplement your income. You can lump sum withdraw the cash, or you could create an income stream for yourself. I have clients who invest $200 per month for 20 years, and then when they are done paying, they can withdraw $4800 a year for the rest of their lives. If they live up to age 85, that means they would have invested $48,000 to withdraw $168,000. The longer you live, the more you benefit, and when you pass the remainder all goes to the beneficiary anyway.

No matter what way you save and invest for your child’s future, it’s better to save than not. It’s just a matter of growing your money tax-efficiently, and not leave too much money on the table.

Contact me, and we can go over details and specifics that fit for your particular circumstances.

phone: (647) 588-8879

email: alan.yu@meritrust.ca

Alan Yu, (647) 588-8879