RESP: Forget the free $2500. Do this instead...

A white dump truck with dollar bills

Understanding the time value of money is a crucial principle in wealth creation. Simply put, a dollar today is worth more than a dollar in the future because of its potential to earn returns over time. This is why investing as early as possible can have a profound impact on long-term wealth.

One of the best ways to leverage this concept is by maximizing contributions to a child’s Registered Education Savings Plan (RESP) as soon as they are born. Most parents contribute $2,500 annually to receive the Canada Education Savings Grant (CESG) of $500. While this is a common strategy, it limits the investment’s growth potential due to the shorter time horizon.

A more powerful approach is front-loading, contributing the maximum lifetime RESP limit of $50,000 at birth. Although the government grant remains capped at $7,200, the advantage lies in allowing the full $50,000 to compound tax-free for up to 18 years. This strategy maximizes the benefits of long-term growth, potentially resulting in a significantly larger education fund compared to annual contributions.

By understanding and applying the time value of money, parents can supercharge their child’s RESP, ensuring they have the financial support needed for higher education with minimal financial strain. Investing early isn’t just smart when you have the means. It can be life changing. Don't just leverage money. Leverage time - while you have it.

Scenario 1: $3,000 every year for 18 years (your $2500 = Governments $500 until a max government grant of $7,200 is reached). Future investment value: $161,397.14, assuming an annual rate of return of 10% for 18 years.

Scenario 2: $50,000 once (max out the RESP for the first year and forgo the government grants - you only get $500). And then, don't contribute anything for the next 18 years. Future investment value: $300,234.67, assuming an annual rate of return of 10% for 18 years.