As a concerned parent, you must be planning effective savings to ensure a good financial flow as your child matures. While RESP happens to be the first investment avenue that most Canadian parents can think of, have you considered any alternative investment tool?
This post will walk you through all of the possible ways to begin saving for your child’s future. Check out the ultimate guide to save money for your child’s future here https://www.insuranceforchildren.ca/ultimate-guide-to-saving-money-for-your-children/.
Whether you are concerned about rising inflation and financial uncertainty in the future, it makes sense to choose the right savings instruments. With the job market looking challenging and educational expenses rocketing high, parents should go for an early investment for their kids.
How much should you save for your children?
There’s no rigid norm deciding the amount you need to save for your children. However, when you invest, make sure not to compromise your financial security for the long term. At times, parents end up sacrificing their retirement savings, trying to build funds for their children. Before you start transferring funds to your subsequent generation, make sure to have adequate savings for yourself.
Once you take care of your home mortgage repayments, savings, and retirement funds, you can focus on the financial security of your children.
Experts recommend saving around 3% to 5% of your monthly income for your children. Therefore, if you have been earning a net income of around $ 6K, you can save around $200 to $300 for your kids on a monthly basis. This amount should be reasonable enough so that it doesn’t disturb your funds or spending equilibrium.
Now, several factors like the risk tolerance, time horizon, and purpose of use would determine where you invest the money.
Going beyond RESP while saving for your child
Planning your savings for children happens to be a crucial decision. According to a Bank of Montreal survey, 83 percent of Canadian parents believe they would fully cover their children’s university or college expenditures. However, 44% of the parents expect their kids to contribute to the funds as well.
While you would be going for an RESP, here are some alternative investment instruments that can help you save for your child.
1. Go for a non-registered account
It is easy to set up a non-registered account that would help you save adequate funds for your child’s schooling. You would also benefit from the flexibility and simplicity of these plans.
With a non-registered account, it is possible to withdraw the funds whenever required. Besides, you would be in complete control of the funds until your child matures.
However, parents need to resist the temptation to channel these funds for other priorities. Also, the capital gains on your funds in a non-registered account would be subjected to tax.
2. TFSA (Tax-Free Savings Account)
If you have been seeking some tax-saving investment options to accumulate funds for your child, you can consider TFSA (Tax-Free Savings Account). However, you need to wait for the child to attain the age of 18 before you can start accumulating the funds. You won’t have any tax implications when you go for a TFSA.
You can enjoy the flexibility, as there is no norm on the limits. However, it would be wise to buy life insurance for your child just after their birth, as you can start investing early. Later, you can open a TFSA.
3. Setting up a trust
A trust is a legal agreement to transfer funds to your next generation according to predetermined terms.
This protects the funds while ensuring proper control and management. When you set up a trust, you would have the mental peace that the amount would serve the intended purpose.
When you set up a trust, make sure that you outline the specifications clearly. However, you might have to consider some tax implications when you go for a trust.
Also, Read: How To Automate Your Small Business
4. Corporate dividends
Canadians having an incorporated family business can accumulate savings for their children in the corporate account. When the time comes, they can pay out the amount as a corporate dividend. This amount might serve purposes like your child’s higher education.
However, the child also needs to own certain shares in the organization. When the child receives the dividends, there would be some tax implications. However, considering the low income at that age, it won’t be an issue.
5. Life insurance
While you might think that the life insurance plan serves what the name indicates, specific plans have other benefits. With a whole life insurance policy, you can arrange the necessary funds to support the post-secondary educational expenses of your child.
Moreover, parents can defer the tax implications while saving money for their children through a life insurance policy. Certain policies also help in funding weddings and managing other expenses of the child.
How can a whole life insurance plan benefit your child?
When you explore alternative plans for accumulating funds for your child, you cannot possibly overlook whole life insurance schemes. However, this is not a government plan, unlike RESPs. Therefore, the parent or the child reserves the right to decide where the funds would be used.
In case of an RESP, you need to accept the government’s decision on the child’s schooling. Eventually, you would have a restriction on where you can spend the accumulated funds.
Since whole life insurance entitles you to use the money as per your needs, you can allocate the funds depending on the priorities.
Moreover, you can make an early investment, even when the child is 14 days old. Unlike TFSA, parents need not wait for their kids to mature. Also, whole life insurance would have no tax implication on the parent or the kid.
It would be wise to consult experts before investing in insurance for your child. Besides, the risk exposure for whole life insurance policies for kids is zero. This is why parents are increasingly investing in these policies rather than shares or mutual funds. Considering the returns, assurance, and flexibility, insurance policies for children would be the ideal investment avenue for responsible parents. Contact the experts and have a look at the best child insurance policies.