Supercharged: Your RESP should be like the Batmobile
The Batmobile has always been a cool part of the Batman movies. Batman does not have superhuman powers like Superman and The Flash so he needed a car to get around Gotham City to fight crime. He needed a very special car.
I like the version in the Batman Begins movie. The Batmobile was originally built as an off road military assault vehicle by Wayne Enterprises. Bruce Wayne got a hold of it and made some major modifications to ensure it could go to war with criminals in Gotham City and evade the police when needed (Stealth Mode). The car played a key role in saving Rachel Dawes life when she was poisoned and it saved Gotham City from certain doom.
The Batmobile had the armour of a tank to protect Batman but could beat a Corvette in a race. Once the Batmobile speed hit 100 mph it became an unstoppable battering ram. Despite its size it had to turn corners on a dime. It’s not easy driving on downtown streets at high speed. Don’t even get me started on the high powered machine guns and countless missiles. Batman’s ride was an engineering, automotive, military technology marvel.
A great car for a superhero to employ offensive and defensive strategies when needed. This is what your child’s registered education savings plan (RESP) should be like: supercharged.
Education after high school is expensive. The U.S. student loan debt hit $1.6 trillion this year (2020). For some people it is the largest form of debt they will have and it can take decades to pay off. It’s hard to get an exact number of student debt outstanding in Canada. The total amount of student loans owed to the federal government is over $18 billion. This does not include student credit card debt and lines of credit. This is crazy because 17 year-old kids can’t vote, rent a car, buy alcohol or get a car loan but can qualify for tens of thousands of dollars of student loan debt. Also in both countries parents take out home loans and/or use their credit cards to help their kids pay for school so it doesn’t show up in student loan stats. It best to talk to parents who currently have kids in university about total costs. They can give you the latest info.
The cost of higher education is the real villain in this world. In many cases the student loan debt repayments (you have to pay it back with interest) become unbearable and lead to personal bankruptcy. Thanks to special laws regarding student loan debt and bankruptcy, the student loan debt is still there after the dust settles. People learn the hard way that it’s as bulletproof as Superman.
The RESP (529 plans in the U.S.) can be a superhero vehicle like the Batmobile if set up and used properly.
Money inside the RESP grows tax free over time and the federal government gives you generous grants. For example, if a parent contributes $2,500 a year to their child’s plan the government pitches in $500. That is a 20% return with no risk. No investment product in the market can guarantee those returns without risk. Ask any financial advisor. Do it every year and after 18 years you have a small fortune. Depending on family income, a child can qualify for more money from the government. In some cases, a child can qualify for up to $2,000 in grants (Canada Learning Bond) without the parent contributing a dollar. Parents have to open an RESP at their bank or credit union, the grant money gets deposited in their account if they qualify.
If you are currently a high school student, from a low income family and working part-time/summers to save up for university then I recommend talking to someone at your bank about transferring the cash from your savings account into an RESP account. The government will not only give you 20%, you might even end up doubling or tripling your money with all the grants. It is the smart financial thing to do.
Everyone’s situation is different so please do some research and check out the Government of Canada's website for the latest RESP info.
Important point: RESP money can be used for more than just paying for tuition and books. As long as the money is used for educational purposes, just about anything goes. The government is flexible on what it considers eligible expenses. There is no published list of eligible expenditures.
You can use the RESP money to purchase a car as your child will need to get to and from school. All car related costs are fine so gas, insurance and parking at school are fine. A reliable used car can be an asset for many years and even help you land a part-time job during school. If you are in a trades or apprenticeship program you can purchase a reliable used Ford F-150 which you will need once you start working to carry your tools. Actually used pickup trucks retain their value. You can also use the RESP money to pay for rent, furniture, food, trades tools (not cheap) and laptops. Again, check out the government website and ask someone at your bank how people are currently doing this.
The American 529 plan is similar to an RESP. Government grants vary by state. Both plans are tax sheltered – any income, dividends, capital gains earned in the accounts are not taxed. The contributions grow tax free. I read an article in the paper where a grandparent invested his grandchild’s RESP money into tech stocks like Apple, Google and Facebook and the RESP grew to over $500,000. These results aren’t typical but do show that the sky's the limit if you invest right and are comfortable with risk. This is where you can supercharge your RESP or 529 plans.
If you start early enough then I recommend purchasing blue chip stocks, exchange traded funds or even mutual funds. It is not about just making money, but learning how to invest. The entire family will learn about different investments and see how they perform over time. Every person needs to learn the basics of investing if they plan on being financially independent so start the kids early and let the real life financial education begin. You might be in a position where the dividends alone could cover higher education costs (along with scholarships and part-time work). Keep the principal, and spend the interest & dividends.
Starbucks is a major holding in our RESP. Checkout our Starbucks analysis. Their lattes (Flat White is our mom’s favourite) supercharge customers with caffeine and store profits which ultimately powers the stock price to new highs. They have regularly increased their dividends over the years.
The following is a quote from Jeff Bezos, a founder of Amazon and the richest person in the world:
“Anybody who doesn’t change their mind a lot is dramatically underestimating the complexity of the world that we live in."
The average person will change careers 3 to 5 times during their working life. That is career changes not job changes and I am being conservative. Most people will go through at least one major career change before their 40th birthday. This could be for many good reasons: the industry is declining (i.e Newspapers), there is no room for advancement in your career, the job doesn’t pay well, you want to leave the private sector to go into the nonprofit sector or your job simply becomes boring. When we were remodelling our house we learned our electrician used to be a banker. He said he got bored and wanted to work in trades. He makes more money now and is much happier.
An RESP account can remain open for 36 years (529 plans have no end date). This gives your child plenty of time to pursue a post-secondary education or to upgrade for a new career(s). For example, Your 30 year old daughter could register in an automotive technician program at a local college and take some aerospace engineering (rocket science) classes after she becomes bored of being an Accountant. She can literally create her own Batmobile and use RESP money to pay for it.
A supercharged RESP is like the Batmobile. During the movie it’s jet engine allowed it to fly through the air when all the bridges into the city were closed. Everyone, including the police, stood by their cars mesmerised by the sheer awesomeness of the Batmobile wishing they had one. Batman saved Gotham City that day. You can save your child’s future by setting up a supercharged RESP or 529 plan. You can be their superhero.