Raising Memories: RESPs & Compound Interest: Why Starting Now is Better Than Later!
  

Thursday, February 2, 2017

RESPs & Compound Interest: Why Starting Now is Better Than Later!

Finances are important, but they can get complicated, and it's easy to get frustrated with all the math and feel like giving up! Considering my recent posts about RESPs, today I want to explain some things about compound interest. If you're not familiar with compound interest or how it works then this post is for you! I'm going to tell you what it is, show you how it works, and demonstrate why it makes a big difference to your investment if you start saving as soon as possible!



What Is Compound Interest?

Simply stated, compound interest means that your interest earns interest. By investing early, you could get a lot more return for the money you invest when you start (your principal investment) than you would with non-compound interest (this is called simple interest).


A Visual Example

To help you see how this works, I've put together a chart for you that shows the difference between an investment with compound interest, compared to an investment with simple interest:



The green column shows what would happen with compound interest and the orange column shows what would happen with simple interest. Both columns start out with the same principal (starting) investment of $1,000 (shown in purple text). Each row shows another year of time that your $1,000 is invested and the dollar amount goes up as much as it would if you were earning 6% interest each year.


If you look at the final row (Year 16), you can see that the compound interest earned on the principal amount of $1,000 (at this interest rate) by the 16th year is a lot higher than the simple interest earned in the same amount of time!


Investing Early is Important!

Another thing about compound interest is that it pays off the most in the later years of your investment (because you've accumulated more money to earn interest on). I think this is easier to show you with another visual, so here's a chart I made that compares the compound interest earned on $1,000 over 10 years (yellow column), compared with the compound interest earned on $1,000 over 18 years (pink column) with an interest rate of 6%. You can see that the investment in the yellow column starts later, in Year 8.


As you can see from the final row of this chart (Year 18), you would earn a lot more on your $1,000 if you had set it aside years earlier, than you would if you set that same amount aside eight years later. I hope this helps you to see why starting earlier is better with RESPs! That said, don't despair if you're feeling like you're late to the party. After all, even in our example you get a free $791 on your $1,000 investment after eight years instead of nothing! The important thing I want you to realize is that the best time to start is now!

Of course, with an RESP, you can continue to add to your investment each year, which will increase your earnings even more. You can also benefit from government grants and incentives (I'll share more about those in a future post), but I wanted to show you a basic example of how compound interest works in your favour!


Learn More

Heritage Education Funds is one of the leading RESP dealers in Canada.You can learn more about them–as well as about RESPs in general–by visiting their site.


Previous Posts

I've written a few previous posts about education savings plans on the blog. If you missed them and want to take a look, you can find them here:



Happy Saving!


Disclosure: This post was sponsored by Heritage Education Funds. All opinions shared are my own.

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15 comments:

  1. Wow...that is a whole lot of math and now my brain hurts lol but I do appreciate you explaining it because now I do have a little more clarification. We don't have an RESP for the kids but we do have a Savings account and as soon as I convince my husband (your breakdown may help) we'll be switching it over.

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    1. haha Yes, well hopefully the main point got across without you having to do the math yourself ;)

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  2. Thanks so much for explaining this. I always wondered what the difference was. Might have to look into this for the girls.

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  3. My hubby takes care of the number game, so far I think it's been working in our favor :)

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  4. Thanks for the charts. Trying to understand this stuff usually makes my eyes cross. I think my fav thing about RESPs, and the one thing that keeps me on track with putting money away for my girls every year, is the government grant contributions. I'm usually thinking about that grant money and not really considering the fact that it's an investment that is going to bear interest.

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    1. I know what you mean. Yes, those incentives are great! I'm so glad they do that!

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  5. Thanks for taking the time to show this - I love the charts as I am a visual person. It's amazing how much people can save if they know the best options.

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  6. I love this post because of the visuals. We're trying to explain saving to my 6 year old and I think the graphics really help. He already out away $150 in his bank account this year. I know This will entice him to keep it up.

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    1. Oh good, I'm glad! Good for you, for getting a bank account going for him! :)

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  7. Love you for this. You know when you learn stuff in school and then it just somehow disappears? This is it. I am glad we have RESPs for our kids!

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    1. Thank you! I'm glad it was helpful! :) & I'm glad you have RESPs ;)

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  8. I think that now-a-days it's important to have RESPs, starting to save early on is a must to take advantage of the compound interest, which I'm sorry to say a lot of people don't seem to understand too well. I have 7 children and 5 of them went to university and it's extremely expensive! So start saving as soon as you can, even if it's only a little, over the years it adds up.

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  9. Education is the best investment you can make for anyone, especially a child. It has limitless possibilities. And investing in RESP's is the best and easiest way to do that for your child; in Canada the government also matches your contribution with a 20% match on $2,500 contributed per child per year, but if your income is lower, you can get a 30% or 40% match on the first $500 saved each year.

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Thanks for taking the time to leave a comment- I love reading them! :)
~Heather Lynne

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