I think we’ve all had clients who were diligently filling up their child’s RESP for years before they were willing to put money away for retirement. For some, saving for retirement vs. saving for education can become a catch-22. When you don’t feel like you can afford to do both, parental instincts can take over and make clients feel that prioritizing filling up the RESP is tantamount to putting their child first. It’s only natural that parents, especially new parents, would want to set their little ones up for success in the future. But the airline oxygen mask analogy might help parents understand how putting their long-term financial needs on the back-burner could create more financial risk for their whole family.
Fund both with a cash flow plan
One of the easiest ways to help clients balance the pressure to save for their child’s future against their own is to find them enough money to do both at once. It’s not always possible to free up enough money to fund all financial goals. Still, you drastically increase the chances of covering multiple priorities when your client has a written cash flow plan.
A written cash flow plan should provide simple strategies that the client can follow. It should include specific steps that make it easy to keep their weekly spending within a specific range. Any money freed up by doing these types of plans should be given various jobs, including funding shorter term goals, emergency savings, and longer term goals, like retirement and post-secondary education needs, as well as paying off debt. Most clients won’t know how much they could free up to fund what’s important to them without this type of structure. A cash flow plan is just as effective for higher income clients, so don’t save this special skill for those who seem to need it just to make ends meet.
Design a Goldilocks exercise
At CacheFlo, when we're trying to figure out the right balance of competing initiatives or smooth out something that's not working for everyone, we do what we call a Goldilocks exercise. We make a “too hot” and a “too cold” list. The too hot list is full of things that create too much stress or pressure, and make things feel overwhelming. The too cold list is for things that seem too ambiguous, too slow, too easy to forget, or make people feel disconnected. Then we talk about our goals around the initiative we're discussing, and finish off by creating a "just right" list.
You can do this exercise with your clients to help them figure out their just right, so they can help their children pay for their post-secondary education without putting themselves entirely off track for retirement. If you've found money with a cash flow plan, this strategy can also help you and your clients figure out how much is just right to put towards their child's education.
Make the most of post-secondary funds
How many people could be in far less education-related debt if only they'd made different financial decisions in college or university? Saving funds is one thing, but providing your clients with strategies to keep their kids from wasting those funds makes every dollar more valuable.
Here are some strategies that your clients could use to help their kids manage their post-secondary resources.
1. Use the same separate account strategy as their parent's cash flow plan
Post-secondary students can use cash flow planning concepts, such as a prescribed spendable number. Their day-to-day spendable funds should be transferred weekly into a bank account or prepaid credit card, just like their parents. Their bills should come out of their committed account, and they should be automated, if possible.
2. Manage lump-sum deposits carefully
When students deal with an influx of cash, like student loan deposits, RESP withdrawals, gifts, bursaries, scholarships or even their saved summer wages, they should not hold those funds in their committed or spendable accounts. They need a third account. Luckily, plenty of financial institutions offer free student bank accounts. Even if those funds are used to cover some of their committed or spendable expenses, a manual or automated transfer into the student's appropriate account when the funds are needed will keep them from accidentally overspending.
3. Save regularly, even if it's only a little
Yes, it is possible to save while paying for school. It might not be much, and it might not be possible all the time, but even automating a small savings deposit every month over a four-year degree can add up. Students can also target a percentage of their lump-sum resource to divert to savings. Not only could the student reduce or avoid student debt, but they could graduate with a little bit of savings to help them get off on the right foot.
4. Start building credit
Encourage your clients to be part of their child's first credit card application. Waiting too long to establish credit can reduce a graduate's financial health. But an 18- or 19-year-old with a credit card acquired without any family support can be a recipe for disaster. A great strategy to build credit is actually to store the credit card somewhere safe, and not use it for any type of spendable expense. Instead, automate the payment of a small committed expense (10% or less than the total card limit), like a cell phone bill, and then have the student set up their credit card to pay itself off from their committed account each month. It's no different than paying the cell phone bill directly from their committed account for total monthly costs. But, this way, the student shows a pattern of using a small portion of the limit each month, and paying it off on time each billing cycle. It's a good idea for parents to have a credit check-in once a quarter or so with their child, especially if they are paying for any of the student's costs out of pocket or coordinating RESP withdrawals.
Saving for retirement or saving for a child's post-secondary education doesn't have to be an either-or decision. By having a cash flow plan early on, and passing on the skills they developed when creating that plan to their children, your clients can have their cake and eat it too!
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.