Did you know that compound returns, also known as “compound interest”, and automatic contributions can make a big difference in your education savings? These two strategies can help you achieve your financial goals more quickly and effortlessly. Let’s take a closer look at how these concepts work and the long-term benefits they can bring.
The idea is simple: make your investments work for you. When an investment vehicle allows for compound returns, which is the case for an RESP, interest is calculated not only on the principal you invest (contributions) but also on the interest you have earned. In other words, you get interest on the interest you earned previously. It’s a brilliant way to grow an investment and maintain your purchasing power.
Here is a simulation based on two parents who contributed to their RESPs for 17 years, assuming a 6% rate of return. Parent A elected to contribute to his RESP once a year, while Parent B opted for automatic monthly contributions. This comparison illustrates the financial benefit of compounding: Parent B earned $2,935 more returns than Parent A, a difference of 11%!
|Parent A||Parent B|
|Amount contributed annually||$2,400||$2,400|
|Contribution frequency and returns calculation||Annual||Monthly|
|Total investment value (6% return)||$67,711||$70,646|
|Total returns earned||$26,911||$29,846|
Source: Ontario Securities Commission
Combining the power of compound interest with disciplined saving habits will make you a doubly wise investor. And the best way to be disciplined about saving is to set up automatic contributions, which some people also call “systematic saving.” Here are the three main benefits of making regular contributions to an RESP.
As you’ve probably already realized, capital and returns accumulate even faster if you contribute systematically to your savings plan every month.
Automatic contributions are a great way to make saving part of your lifestyle and plan your budget. This method of saving is quick to set up and helps you stay on track toward your goals. You won’t have to worry about forgetting to make a bank transfer, which can reduce your financial stress.
By choosing to make monthly contributions to your RESP, you have a better chance of contributing the maximum amount of $2,500 per year to qualify for the government grants to which you are entitled.
It’s very difficult to predict the movements of financial markets. With regular contributions, you can stay invested for the long haul and through market cycles. “Since periods of economic growth are longer and more frequent than contractions, an automatic bank transfer strategy allows your investments to participate in that growth,” explains François Galarneau, Senior Economist at AlphaFixe Capital.
The pandemic has also reminded us that markets can be very volatile and unpredictable. “Systematic saving enables you to weather periods of uncertainty by investing at a lower cost when stocks are cheaper and by enhancing the gains associated with the recoveries that follow market corrections,” adds Mr. Galarneau.
First, you need to determine how much money you want to set aside on a regular basis. Use our calculator to find out how much your child’s post-secondary education could cost you and get a better idea of how much you should save.1
Then contact your Kaleido representative to set up automatic monthly contributions to your IDEO+ RESP.2
Not a Kaleido customer? Make an appointment with one of our representatives to learn more about RESPs and systematic saving.
Are you hesitant about embarking on an automatic contribution strategy because you’re worried you might have to discontinue your contributions? It can be done. Just like the financial markets, life sometimes throws us a curve ball. If you have an IDEO+ RESP at Kaleido, you can stop your monthly contributions at any time free of charge by contacting your representative.
You can also decrease or increase your contributions without restrictions. Don’t look at systematic saving as a permanent commitment – it’s actually just a smart, flexible saving strategy.
1. The results shown are for illustration purposes only and are not a guarantee of the future performance of IDEO+ plans.
2. Minimum of $10 per transaction.