Tag Archives: cash

My Child Is Now 15 (Or 16) What Should I Do with My Self-Directed Brokerage RESP?

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Managing an RESP is easy for the first dozen years. You have to make some decisions at the beginning. (Family plan? Individual plan? Bank? Brokerage? 100% safe savings accounts and GICs only? Some risk with equity investing in stocks through ETFs or mutual funds or individual blue chip investments?) After a while, though, you fall into an investment pattern and just stick with it. But as your child (or eldest child) nears the age of starting post-secondary school education, you need to make some decisions again.

First: Move the Money for First Year Into Risk-Free Investments

If your child is going to attend a university and live in residence for their first year after high school, you can estimate that they will need at least $20 000. Programs like Engineering will cost more. Living at home might cost less. But $20 000 is a good starting estimate and it’s likely they will actually need more than that for a university program, unless you live in and they want to attend university in Quebec.

You may have that $20 000 invested in equities. It may be in a mirror-the-stock-market ETF, a mutual fund, or shares in specific companies. If, the week before you need to take it out in cash to pay for residence or fees, the stock market has a sharp pull-back you could be in trouble. A 10% drop in the equity market might drop your $20 000 to $18 000.

Many people who have RESPs with over $20 000 in them could probably delay liquidating the equities in the RESP for a while. They could find the money to pay for residence and tuition in other places, like their emergency fund. But that might not be a great idea: it can take a year or more for the market to rebound. And, of course, there is no “stop limit” that guarantees it will only decline 10%. It could crash like it did in 2008-2009 and take years to claw its way back up.

So if you’re risk averse like I am, you will probably want to get that $20 000 for first year into something risk free before it’s needed. When your child reaches the age of 15 or 16, you may want to put that $20 000 into a cash account or a GIC or term deposit of some kind. I’ll be checking the rates offered by various investments at BMO InvestorLine soon.

Next: Consider WHERE You Want to House Your RESP While Your Child Is Making Withdrawals

According to the CRA information for RESP providers (like banks and brokerages) once your child starts making withdrawals from the RESP, you cannot move the RESP to another institution!

So in the year or so before your child graduates from high school, you should evaluate your RESP provider. Are there fees to make withdrawals from the RESP? What type of paperwork will the provider require to make the withdrawals? Would it be easier to move the entire RESP to another provider with lower fees or less paperwork?

Reading about some of the strange requirements for RESP withdrawals that others have experienced in the past makes me nervous. Soon, I will start looking at the rules at BMO InvestorLine and deciding if they are acceptable. If not, I will need a few months to get the investments transferred elsewhere. So I’ll want to make the decision long before my child is in final year at high school.

Finally: Develop a Strategy for the Next Few Years for the RESP

If you have more than one child, you also may need to plan a strategy for the RESP. When will you liquidate any equity holdings? Will you sell them when a certain profit is achieved? Or will you sell them based purely on the time at which the money may be needed? Will you buy a series of GICs with 5, 4 and 3 year terms, or only use 1-year terms?

How will you make the division of the loot equitable? What if you liquidate the equities for your eldest child when the market is high but when you go to do the same for your youngest child the market has been down for years? Do you “owe” each child the same number of dollars for their education? Will you “hold back” some of the money from the eldest child in case you need it to keep things even for the youngest of several children?

It’s better to develop a strategy before the first child starts using the money. Which means my husband and I have some thinking to do!

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How much money do you expect your child to need for their first year of post-secondary school education? Will you try to set that amount aside in cash or fixed income investments a year or two before they finish high school? Please share your views with a comment.

How Can I Estimate My Spending Without Doing a Spending Journal or Log? Part One

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The best way to track your spending is to write down every single cent you spend and why. (If you pay by debit or credit it’s still to the penny not the nickel.) But if you don’t, won’t or can’t, you may need to estimate your total spending without the benefit of a journal or log: here’s how I estimated our profligate expenditures.

In the Beginning Money Was Tight and Controls Were In Place to Identify Places to Cut Costs

When I finished university and started my first job, I bought a notebook and started tracking my spending. Everything, from the 25 cents I put into a parking meter to save a stranger from a ticket to the $99.98 I spent on a portable vacuum cleaner (no sales tax in Alberta in those pre-GST days!) was written down at the end of the day. I knew I could lose my job at any time due to the recession and saving an emergency fund was priority one.

It was an interesting exercise. I learned, for example, that I was donating and gifting way more money than I would have estimated. Every birthday, birth, transfer and retirement in the office was celebrated by passing the envelope. Although new hires weren’t expected to contribute much, even $5 (which would be about $10 now) started adding up when you multiplied it by 2 to 4 events per month. And the endless charitable appeals, particularly for the United Way, but also for the Cancer Society and other big name charities also were surprising. Our office often had things like pay $2 to dress-down on Friday, all money going to the charity. Or selling daffodils or carnations or other flowers for the charity of that month.

I’d always known eating out was expensive and I limited myself to one lunch out a week. I made sure it was worth it, especially in terms of flavour. And I chose food that would be difficult or impossible to replicate at home so that it added to my enjoyment. Still, it was sobering to see the cost of one meal was over half what I spent on groceries for a week.

Eventually, though, my income far out-stripped my spending. So the logging of my spending in a journal stopped.

As We Approach Retirement Understanding Our Spending Becomes Important Once Again

Once retirement became closer to our current age than our first jobs were, it began to be important to understand our spending again.

We save over half of our income, so we haven’t been very worried about the details of our spending. We are both savers by nature and both people who prefer doing things to buying things so we knew we didn’t have to agonize over each time we sponsored someone’s bike trip down the Don Valley for $50.

But our retirement income will be very low. We don’t have defined benefit pension plans and I won’t get the maximum CPP. A lot of our savings are at the whims of stock market and we don’t trust equities not even blue chip dividend stocks.

So the inevitable question loomed: how much do we spend now and how much of that is discretionary? When will we have enough income to retire?

The Black Box Method of Estimating Annual Spending for a Very Simple Life

When I was a student it would have been easy to use a Black Box method to check my annual spending. In those days I had no credit card and debit cards had not been invented.
I would have been able to check

IN = total income in (add up deposits to my bank account from my jobs and from my parent’s kindness)

CHANGE = change in my bank account balance between the start of day balance on January 1 and the end of day balance on December 31

SPENDING = IN – CHANGE

For example, if I had added $ 1000 to my account during the year, and by the end of the year my account had shrunk from $2000 to $500, then

IN = $ 1000

CHANGE = ($500 – $ 2000) = $ – 1500

so my

SPENDING = 1000 – (-1500) = $ 2500

First year university looked a lot like that as I spent my life savings on text books and train fares.

The Black Box Method of Estimating Our Annual Spending Now

Nowadays, the equation is the same but much more complicated. I’ll explain in Part 2 what I had to do to estimate our annual spending now.

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Do you track your actual spending or do you just wing it based on your credit card report? Do you realize your office is emptying your wallet but you’re not sure how, when or where? Please share your views with a comment.