June 2002

Another Better
RESP Alternative

© Talbot Stevens

The February, 2002 Strategy Sheet introduced how conservative leverage could be a more effective strategy for financing an education than RESPs. The tax deductibility of interest and the magnification effect of borrowing to invest can potentially exceed the RESP benefits of tax deferral and 20% government grants.

Yet, for some, there is an even better way to help cover the increasing cost of post-secondary education.

In today's knowledge-based economy, expensive post-secondary education is more important than ever to compete for income opportunities in the future. This means that it is better for parents to "give" children a college or university education than for them to go without.

However, simply gifting a young adult $20,000 to $100,000 does not always ensure that the child succeeds in getting an education, especially if they are not committed enough to invest their own blood, sweat, and tears in the form of focus, discipline, and time. Indeed, many students who have their schooling "paid for" do not value the career investment enough to finish, resulting in setbacks to the ex-student's self-esteem as well as the family's finances.

Business owners have the unique opportunity to not only secure their own financial future independent of employers or the government, they can also help their children get started in the same direction in several ways.

The best strategy for financing an education is to help the child value the investment in their own future enough to work for and pay for most of it themselves. Instead of handing over education money, business owners can invest their time and money to create the opportunity for their children to earn their own money to get themselves through school.

By hiring children for legitimate business work at reasonable wages, they not only learn that success comes from focus and a strong work ethic, they learn about responsibility and managing money.

Like any expense, the child's salary is tax deductible. The basic personal exemption allows anyone, including children, to earn about $7,500 a year totally tax free. Of course, the money earned could be invested in RESPs - ideally by the student - to get the 20% government grant on $2,000 per year.

The additional benefit of this business education plan is that the family gets to work together, giving parents more opportunity to steward children in learning the critical "real world" lessons to complement their classroom education.

Can this business education plan work for those who don't run their own business? Absolutely. Teach your children the need for and benefits of taking responsibility for their own education, invest the time and money to help them acquire the skills that others will pay for, and help locate a job or business opportunity for them to pursue.

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