New parents are often more concerned about buying diapers and finding the best sippy cup than about future tuition for higher education. When your baby is young, it's hard to imagine sending them off to college one day. However, you will eventually need to consider how you will pay for your child's education.
College tuition prices continue to rise, making higher education challenging for many families. You must start saving to avoid scrambling for funds when your child fills out college applications. You should start thinking about college-saving strategies as soon as your child arrives.
Investing may be a new concept for young parents, but for the future sake of your child, it's important to understand the difference between RESP vs RRSP. Setting a budget and finding the best investment for your family needs to be a priority. Let's take a closer look at some reasons parents should start saving for their child's educational costs.
Compounding Interest
Investing in a Registered Education Savings Plan or RESP is a great way to save for future education costs. With an RESP, you can put your money to work. Compound interest means that you will earn interest on top of interest on your contributions. Earnings in an RESP also grow tax-deferred.
Compound interest is a powerful concept in finance, and it plays a significant role in the growth of an RESP. When you contribute money to an RESP, it is invested in various financial instruments, such as stocks, bonds, mutual funds, or Guaranteed Investment Certificates (GICs). These investments generate returns over time.
Open Contributions
When a new child arrives, family and friends look forward to showering them with gifts. When you start your college savings early, you can include contributions from grandparents, aunts and uncles, and friends. An RESP can take contributions from anyone, so it creates a great gift-giving platform. In lieu of traditional gifts for birthdays and holidays, family members can make contributions for the future.
Goal Orientation
Having a savings plan for your child's higher education is a good launching point for their future. You can create an underlying plan for your child to pursue a post-secondary education of some sort when you start your education savings plan. Knowing their educational costs won't be a huge concern gives your kids the freedom to dream about their future.
When parents create an underlying plan for their child's education and start an education savings plan, it provides a solid foundation for the child to pursue post-secondary education and encourages them to dream big about their future.
Savings Habit
When you start your child's college savings fund early, the contributions become a habit. Before long, you won't even notice when you automatically reroute funds to your RESP. By starting early and making regular contributions, you can take advantage of the power of compounding and build a substantial college fund over time.
As your child grows older, the RESP contributions can increase accordingly. For instance, if your financial situation improves or certain expenses decrease (e.g., paying off a loan or reducing childcare costs), consider redirecting those freed-up funds towards higher RESP contributions. This way, you can accelerate the growth of the college fund.
Cover the Unexpected
No one can predict the future. There could be job loss, illness, or multiple relocations that can interfere with your college-saving efforts. When you start saving early, you will have accumulated a good start in your college fund in case of a financial emergency. Contributions don't have to be made regularly. Plus, whatever money is already in your fund will continue to grow through compounding interest.
Ensuring a prosperous future for your children is the most important aspect of being a parent. If you want to establish a solid savings plan for your kid's college career, consider these benefits of starting your investment early.
