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When to Start Saving for an RESP in Canada
Saving for your child's education is a significant financial decision, and a Registered Education Savings Plan (RESP) is one of the best tools available to Canadian parents. But when exactly should you start saving? The answer is simple: as soon as possible. Here’s why starting early can make a big difference.
The Power of Compounding Interest
One of the primary reasons to start saving early is to take full advantage of compounding interest. Compounding allows your investment to grow exponentially over time because you earn interest not only on your initial contributions but also on the interest that accumulates. The earlier you start, the more time your money has to grow.
For example, if you start contributing $100 a month to an RESP when your child is born, assuming an average annual return of 5%, by the time your child is 18, you could have around $35,000. If you start when your child is 10 years old, you would accumulate significantly less, even though the monthly contribution is the same.
Maximizing Government Grants
The Canadian government provides additional incentives for saving in an RESP through the Canada Education Savings Grant (CESG). The CESG matches 20% of your annual contributions up to $2,500, with a maximum grant of $500 per year per child, and a lifetime maximum of $7,200.
By starting early, you ensure that you can fully benefit from these grants. If you delay, you might not be able to maximize the total grant amount. For instance, if you start saving late, you may need to contribute more than $2,500 per year to catch up, but the CESG will still only match up to $500 annually.
Flexibility and Contribution Room
Each year, you have a contribution limit of $50,000 per child for an RESP, but there are no annual contribution limits. However, starting early gives you the flexibility to spread out your contributions over a longer period, reducing financial strain.
Preparing for Rising Education Costs
Education costs have been steadily increasing. By starting an RESP early, you give yourself a head start in meeting these rising expenses. The earlier you begin, the better prepared you will be to handle tuition, books, and other education-related costs without having to rely heavily on student loans.
Peace of Mind
Finally, starting early provides peace of mind. Knowing that you are steadily working towards securing your child's educational future can reduce stress and allow you to focus on other financial goals. It also sets a good example for your child about the importance of saving and planning for the future.