Planning for the Future

Madison, whose 14, has had a job since February. Everything he’s earned – except his monthly “spendable allowance” of $30.00, which he has pretty much adhered to (though he’s up to November, 2006) – has been put into his account in the bank. I told him when he started his job: “We’re going to put everything you make until the end of the summer into the bank. Then we’re going to cut it in half and put one half into a Registered Education Savings Plan (RESP) for your education. The second half will go into mutual funds for your education but you can spend the third half totally as you want to.”

For a 14-year-old he’s done OK. He has a good education fund started and he bought himself a color TV for his bedroom. When I was 14 there was no such thing as color TV, unless the tube went and turned everything greenish-gray. And never mind having one in your bedroom!

Anyway, last week it was time to set up Madison’s RESP so I marched him off to the bank to meet the fund manager. On the way to the bank, Madison stopped at a pop machine to buy a can of pop. Normally, this sort of detail would be meaningless and thus omitted from the story. But on this occasion it’s important. Here’s why: the can of pop cost $1.00, according to what it said on the front of the pop machine. Madison only had a twonie so that’s what he deposited into the slot on the pop machine. He got one loonie and three quarters back, plus the can of pop. More on this later. For now, we go back to the bank.

When we got there we were ushered into the fund manager’s office. She told him all about why an RESP would be a good thing for him and his future education. “The government will give you 20 percent of what’s in your account,” she said. “Plus, when you take it out – though you can only take it out for educational purposes – you’ll be taxed on the interest you’ve made but only at your then current income level. So, if like lots of kids of school age you make less than $6,000 when you take it out, you won’t pay any tax at all.”

I piped up and put it in cold cash layman’s terms for him: “If you put $100 in your RESP,” I said, “the government will give you $20.00 more.” This, even to a 14-year-old kid, sounded pretty darn good.

But on the way home he grilled me. “Is 20 percent really a good return, dad?” he wanted know.

“Oh, you betcha,” I said.

“But I did better than that on the pop machine,” he said, and here’s where that incident with the pop machine comes back into the story. He continued talking. “The can of pop cost a buck,” he said. “I put in a townie and got back a dollar seventy-five plus the pop, which I could turn around and sell for another buck. If I do that, I make 75 cents and that’s a return of 38 percent, which is almost double what the government is going to give me if I put the money in the bank instead of a pop machine. And if I had put a loonie into the pop machine instead of a townie I would have made a dollar seventy-five right off the bat and then another buck after I sold the pop and that’s a whopping 275 percent return on my initial investment. So although I see what you’re saying about the RESP dad, I’m thinking maybe pop machines would be the better way to go.”

“Listen, son…”

“And it’s not just pop machines, dad,” he continued. “At school there’s a snack machine that tosses three bags of chips at you when it’s only supposed to give you one. The principal doesn’t know about it. So I could get some chips from there with a minimal initial investment using the money I’ve set aside for my education. Then I could sell them to my friends and make triple my money back, and at that rate I could put Sadie and Margareta through university, too – and you too, dad, if you want to go back. Plus I could drive to school in a brand new corvette.”

I told him I’d check to see if the bank had a pop machine in the lobby.