Episode 21: Four (4) Ways To Fund Your Child’s Post Secondary Education
Have you thought about the financial implications that your children are facing when it comes to post-secondary education? If you have, how confident are you in the strategy you’ve selected to help ease the financial burden of the opportunity post-secondary education provides? If you’re wondering whether there might be some creative and safe ways to help your child continue their educational journey beyond high school without breaking their financial futures in the process, then you’ll want to stick around for this episode where we will share four (4) strategies you should consider to optimize your education savings plan for your kids.
What you’ll learn:
- What options you have to take advantage of grants from the government to help fund education including RESPs for Canadians or 529 Plans for Americans;
- How to use a real estate investment property as a potential investment vehicle to pay for your child’s education;
- How you can teach your child about ownership as you save for their education; and,
How you can use the “Magical Money Machine” known as The Infinite Banking Concept through Participating Whole Life Insurance to help reach your educational savings goals.
- The Truth About Real Estate Investing Episode – Quitting Teaching To Full Time Real Estate Agent
- The Truth About Real Estate Investing Episode – How A Math Teacher Teaches Investing
- Becoming Your Own Banker [Book] – R. Nelson Nash
- The Invested Teacher Wealth Building Booklist
- The Infinite Banking Concept page on the Invested Teacher website
- Download our Wealth Building Blueprint
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Jon: This fund is a balanced fund that says, you know what, in the earlier years it's heavily more equities, less bond. But then as it gets closer to the actual date, it's automatically or it's readjusted based off that date. So it's a little bit more safe by the time you get there. And then it's supposed to grow at a certain rate and they don't guarantee your rate, but they give you some past data to show. You could go the mutual fund route. But Kyle, I think you could also do something that's similar to the way you've done this, which is not necessarily from the bank itself, but in the same style that, hey, you really have this container that will give you the grant money, but you could put this in different kind of growth funds.
Speaker 2: Welcome to the Investment Teacher podcast with Kyle Pierce, Matt Begley and Jon Orr.
Kyle: Get ready to be taught as we share our successes and failures encountered during our real life lessons, learning how to build generational wealth from the ground up.
Matt: Welcome Invested students to another episode of Invested Teacher podcast.
Jon: Welcome folks. We are excited for this episode. In this episode, we're going to chat with something that most families start planning for most families Think about, especially if you've kind of done a little bit of financial planning, your child is born and you're a start to imagine going, Hey, I know they're going to have to go to school at some point. Do I start planning for education now? Do I start planning a little bit later? We're going to talk about four ways to fund your child's education fund. Guys, let's get dive in.
Matt: Looking forward to this one guys, and happy to be back. I was on the verge of becoming a special guest rather than a host. So excited to be back in the podcast here. It's been a busy spring real estate market. This one excites me because I think for so many of us kids are one of our big why's. Why are we investing? Why are we looking for ways to increase our wealth? What's about that generational wealth? And it's about setting our kids up so that they can get a good start to their life. And there's a lot of scary headlines out there about the cost of education, about the cost of housing in the future and a lot of unknowns there. So I think this is a great topic because it hits home as to why we're doing this in the first place and really touches on a way that we can help our kids start off on more successful, more sound footing as they enter adulthood.
Kyle: Yeah, absolutely. And Matt, I think one of the things that is really easy for anyone to do, even the hosts of the Invested Teacher podcast when your children are born, this is sort of one of these discussions that you have and you go, we should start saving for education. And it's like you either probably act on it pretty much around maybe in that first year or it gets put on the shelf and then maybe forgotten about. But one thing that we have here, the three of us, is we have sort of a wide range of ages. So you've got Jon, whose eldest daughter is in grade nine and all the way down to our youngest in grade two and three for Matt and I. And really it's never too late to either review what you've done in terms of your education funding and plans or to actually begin.
So there might be some people who are there going, we're only maybe four or five years away, is it even a point of even doing this? And I would argue that it's never too late, just like it's never too late to actually take control of your finances and your investing, we'll call it approaches, but really your wealth looking at this might be helpful to set you up not only for an education plan, but it might also be helpful to set you up personally, you and your family or maybe your children beyond their education if they choose to go on to post-secondary education. Because some of these plans that we're going to share today are actually not limited to let's say, benefiting only for funding education. And we'll talk a little bit more about that here today.
Jon: Four techniques or the four different options that we're going to present, two I would say are pretty typical of what most people do, but two are going to be a little bit unique for you. Two, you might not have even heard of. One actually is the technique Kyle has developed and thought about and kind of putting into action. Another one is from a colleague and friend that we've heard about That's very unique. But the other two that most people typically plan for with their child's education comes in here in Canada, the form of an RESP. So the Registered Education Savings Plan and the Registered Education Savings Plan is a great option for families because when you contribute into that vehicle, when in that kind of container, then the government here in Canada will contribute up to 20% to a maximum of 500 as a contribution.
So basically, if you want to max out that contribution, if you contribute $2,000 into this container and this vehicle, the government will give you 500 during that year as kind of a grant so that you'll help them achieve that by the time they get to their post-secondary education, they've got that money that's grown. Now, there are some stipulations to that here in Canada that if your child does not go on to post-secondary, then that grant I think goes back in the pot and you still have your original investment and it's growth, but you don't get the grant money if they don't go. So it's not a complete waste if they don't go to that way onwards. But you've got that fund to use for your child at that point. So we're going to kind of outline those options. As I said, two are kind of very unique and then two are very typical. So let's get into the typical and who wants to take that on, guys?
Kyle: Well actually before we do Jon, I just want to also clarify for our US friends that here in Canada we call an RESP in the US you may know it as a 529 plan. Okay, so that's the number that is I'm assuming in the tax code or something along those lines. And others call it a qualified tuition plan. Every state is a little bit different, just like I'm guessing here in Canada, to be honest. I know RESPs as an Ontario resident, but I haven't actually looked into it. Is it for all Canadians and is it exactly the same? So you might need to do a little digging there. I believe it is here in Canada, however, don't take our word for it, but the government is there to sort of help you in terms of compensating. So even if you just think about this for a second, it's like if you were to take, Jon, you had mentioned this $2,500, if you get that $500 a bonus, it's almost like you got a 20% return on your money without doing anything, which is an obvious benefit, but then you can then take that and then invest it in other vehicles.
So we will talk about it in the us It sort of varies it seems. And what I found online for those who are listening from the US and maybe aren't so sure, is that the maximum limits range from about $200,000 over the child's life to $400,000. Now that seems like a lot more than what we have here in Canada, but then also if you look at the average tuition costs and then the cost to actually, let's say go to a university and live on campus is much higher in the US as well. So I haven't actually done the math on this, but I'm going to say it's probably pretty relative. I'm guessing, however, if you're in the US you want to just double check on that.
Jon: Yeah, and one thing I think that I forgot to say too is that max here in Canada is if you contribute, I think you can contribute up to $50,000 in that, and then that grant money kind of just doesn't get contributed. So there is a cap on how much the government will contribute to your education plan.
Matt: So guys, this sounds like the RESP is one of the few cases where you get almost free money from the government, especially without having to qualify or inaudible
Kyle: Or maybe some of your tax money back, right?
Jon: Well, exactly.
Kyle: That's what it is. It's a credit. They're like, here you go. You can have it back.
Matt: And so many times you have to be able to qualify under certain income brackets and things like that. So this sounds like a really great program for people. My wonder within it, and we've got one going for our kids, we've got a family RESP, so it's both girls that the money's contributed towards. I've just got it sitting there in an account in cash. Can you invest within an RESP? Can you take that education fund and then invest within it? Can you walk me through some of those strategies or opportunities?
Jon: Yeah, sure. It's basically a container, right? So you could have a few options. One option that is very typical, I think this is how I started with the RESP way back when my daughter was born, my oldest daughter was born was you go to the bank and you go, "Hey, we got to start doing some planning." The bank's going to have a bunch of products. They're going to market it as, hey, we're going to put it in a fund. It's going to be in the container of RESP. You can contribute up to whatever you set your monthly amount to, or you can set an annual amount and then it can be automatically withdrawn from your bank account. But then that container could have lots of different kind of vehicles. So I think one of the options that I originally went with was a target date fund, so an education target date fund.
So we looked at a fund that said, you know what, by the time 2025, 2026 rolls around, my daughter's going to be entering in post-secondary. And so this fund is a balanced fund that says, you know what? In the earlier years it's heavily more equities, less bond, but then as it gets closer to the actual date, it's automatically or it's readjusted based off that date. So it's a little bit more safe by the time you get there. And then it's supposed to grow at a certain rate and they don't guarantee your rate, but they give you some past data to show you could go the mutual fund route. But Kyle, I think you could also do something that's similar to the way you've done this, which is not necessarily from the bank itself, but in the same style that, hey, you really have this container that will give you the grant money, but you could put this in different kind of growth funds.
Kyle: For sure, for sure. And I want to share sort of a few of these other ideas around this container idea. So you had talked about, so just like Matt's doing, and a lot of people think of a tax-free savings account in the same way because they call it a savings account. So it's a registered education savings account. The thought that probably crosses your mind the first time you hear it is, oh, it's just a regular banking account. It's a savings account, not a checking account. It goes in there, it sits there and maybe collects a really low interest rate, which is probably what's happening in Matt's case right now. It's sort of sitting there, that extra 20% is awesome. That's a bonus. So it's like, "Hey, you got free funds there." But that would be, we'll call it probably the most safe, maybe conservative approach is like, I don't want to take that money and I don't want to risk have any sort of risk with it.
So it's not good or bad necessarily, it's just whatever you're comfortable with. But I think for a lot of people it might be just unaware, right? I'm not sure what I can do with this stuff. So Jon's saying there's mutual funds you can do, but also where we've been heavily leaning towards is if you are going to go with this more passive approach, it might be picking some index funds which are mutual funds, but they're sort of automatic. So the fees are way lower. We're going to say a fifth of the cost in terms of fees on in general. And what you can do is you can almost create your own balanced portfolio of index funds. So now this does require, it is passive. You're not actually going out and working and having to do anything with this. So it's not active. However, it is more active than just firing it over to your banker who has already put together this balanced portfolio for you.
And again, that's why they take the management fee, the MER on that. The other piece you could do is you could take all of those funds and you could buy Tesla. I'm not saying to buy Tesla, but I'm just saying some people are like, "Hey, I could go out and actually buy certain stocks or bonds or other types of assets on the stock market as well." So these are all accessible to you. But the part that we wanted to share with this particular option, so the savings account obviously super low risk. We didn't even have the savings account specifically as an approach necessarily because it's a start. It's where the money goes, but then there's other things you can do with that money. And the benefit again is you could potentially get a higher return on it. So if you want to up your risk, I like how you described there, Jon, the fund that you are in where it almost automatically reduces risk over time. However, I'm going to guess there's probably a decent fee associated with it.
Jon: It's a managed mutual fund that automatically, what I say automatically is being, I don't have to do anything but somebody is rebalancing it, which means you are paying say the typical mutual fund fee for a target fund.
Kyle: Now, if I'm Matt, and this is me just sharing. If you talked to me five years ago when I first started reading about the stock market and really trying to understand and become more comfortable myself with investing in the stock market, I did a lot of reading. And at first my impression was, oh my gosh, these mutual funds are a complete ripoff. Never invest in a mutual fund, don't do it, blah, blah, blah, blah, blah. But I now realize that there are people that fund actually would be beneficial for. So is there a better way to do it? Sure, do it in index funds, but there's also more responsibility, more risk there too on your plate and risk. So if I'm Matt and Matt's going, I have no interest in going down the rabbit hole. That is the stock market. Like Matt, Matt's done options trading courses with me.
I've sort of tagged him along for some of these things, the poor guy, and he's learned a ton. But you also know that Matt misses these podcast episodes because he's so busy in the work he does, which is real estate. So it's like for Matt, I could totally see how going with a mutual fund that does have a higher MER makes sense for his situation. Now, some people are at home going, "I would never pay two, two and a half percent on fees." But you're probably not the person who currently has those funds sitting in a savings account just because you're like, I'm not exactly sure what I could or should do without necessarily taking on too much risk. So I would say that category for Matt might be a good start or he could talk to a guy or a buddy he knows that might be able to help him get some index funds going. I don't know if you know a guy, Matt, but I feel like I might be able to recommend one to you.
Matt: I love that. I love that because it's been sitting there for years and I make sure I diligently put the $2,500 bucks in. So we get the government top up and it's on my list of someday maybe that I'll get to it when I get to it, but my kids are now eight and nine and post-secondary school isn't that far away for them.
Jon: No, it's not. And so if I just do a quick recap here. We talked about this first option so far, which is going the typical kind of traditional, Hey, I've got this RESP, this savings plan that I'm contributing to. I got a couple options while I'm inside that bucket, Kyle, I think we'll still option two here out there are four options that we're going to talk about to build education fund for your child is still in the RESP land. So it's still in registered land, but it's not like say leaving it in savings account or going with a bank and kind of picking a mutual fund or just picking index funds. This is I think what you're doing with your kids. Talk to us about option two here of building RESP.
Kyle: Yeah. Now I do also want to make sure I put a bit of a disclaimer because when I did this, this was when my children were born, we were sort of like, we should do something. At that point, this is old Kyle who was paying down his mortgage aggressively, and that was sort of my plan. I didn't really know what else to do. So I was doing that and then it was like the kids came and I was like, now what do I do? I've got to learn about these things, heard about this 20% just like Matt did as well and just like you did Jon. And I was like, what and how should I do this? And a friend of mine that I was working with said, "Hey, I'll get you a meeting with," a good friend of theirs who was doing this trust plan idea.
Now, at the time, I didn't know what that meant. I didn't really know what was going on, but they made the sales presentation. And at the time, basically what it is kind of like what you were doing there, Jon, in terms of this plan that you might get at a big bank through some sort of fund or target date fund. But this was through what they call a trust. And the one that we were with, I actually, I won't say the name just because if I say something poorly, I don't want them to be mad at me or try to sue us. But the one we're with is very conservative. So at the time I did not know much or really anything about the stock market. I was actually very scared of the stock market because when I was younger back in the tech bubble, I had purchased some Blackberry.
I had purchased Blackberry. That was a stock I purchased. It wasn't a lot, I would say it was maybe a thousand dollars at the time, but that thousand dollars, I think it was 18 at the time, that was a lot of money and it went up and I was like, "Oh my gosh, I'm a genius. This is amazing. And Blackberry's the best." This is before iPhone had its thing. And then at the time when my children were born Blackberry in my account, I'd never sold it. I just hung onto it. Blackberry was worth, I think it was $285 in my account. All right? And they were talking about bankruptcy at the time, so it was like it wasn't getting any better from there. So I just held, and that scarred me from the stock market at all. And I was like, ah, okay. This plan felt like it was super safe.
I would say it was like the RESP for someone who's thinking about the safety around a whole life insurance policy. So we talked about that in the previous episode on episode 20, and we went in on that because I wanted two things. I wanted to take advantage of the 20%. So I wanted the government benefit and I also wanted guarantees that my choice now wasn't going to be hindered. I didn't want it to be the Blackberry scenario where let's say we put in $10,000 or $50,000 by the time the kids are ready for schooling and it's only worth $10,000.
So that was a big fear of mine at the time. So I did this fund and you're making a commitment and it really doesn't make sense to stop once you're in. So I'm still doing that. However, if I knew what I knew now, I'd probably do it differently. However, I do also respect the fact that it's nice to know that I have something that it's like I know exactly what it's going to be like at minimum, and then at maximum there's the upside benefit, right? Much like a whole life policy. So it's not going to go backwards. It's very well managed and there is a cost associated with it. But again, do I regret if it came from investing something to investing nothing. I'm happy where we are. However, knowing what I know now, I would do something different back then.
Jon: Got it. Got it. So thanks for that. So we're going to move on to the third option, which is the first, I'm going to say the first of the unusual or less traditional.
Matt: Love this one.
Jon: Yes, this is a less traditional option. And I'll admit, I only heard about this within this last year. So this one's called the UESSP option. We're going to title this one, the Unregistered Education Szeto Savings Plan, which woo,
Kyle: What does that mean?
Jon: What we've heard is from Erwin and Cherry Szeto, a podcast that we listen to-
Kyle: Truth about real estate investing is the podcast.
Jon: You got it.
Kyle: For Canadians.
Kyle: Short title, super short title.
Jon: So great podcast. Actually both of you two have been guests on that podcast, so awesome stuff there. But Erwin and Cherry have shared this strategy and I think what they've done is instead of going the RESP route, so to get the grant money from the government, this is a completely separate thing, they said, you know what? They are real estate investors. And they said, "You know what? Why don't we buy a home? Why don't we buy an investment property in the name of our child? And then hey, it's going to hit the three silver bullets of in real estate investing that we've talked about here on this podcast that said, I'm going to get my mortgage, I'm going to get build equity in the home over the course of the lifetime I have for this home as it's going to grow, I'm going to get appreciation on that or hope to get appreciation on that."
And we're doing this early so that by the time my kids are getting to post secondary, I've got this appreciation built up, I've got this equity in the home and we've also, maybe we've had some cash flow on this property that we've been dumping into this other account, or maybe it's put back on some of our other investments. But you basically, you're building this kind of fund. You're creating your own fund based off a real estate investment property so that by the time your kid goes to post-secondary, theoretically you could pull some equity from that home and use that to help fund your education plan or education expenses for your child to go off. And here's the beauty thing I liked about this guys, is that the other two options that we discussed here, when you go to pull your funds from those RES+P accounts from the bank or from your trust, Kyle, the asset's gone, right?
It is an asset, but then you've pulled that money from that account and no longer you're getting that continued growth because you had to pull it out of there, it's physically gone, you've paid it to the university or you've used it for rent on an apartment or a residence, it's gone. Whereas if you are doing what Erwin and Cherry are doing and you take that equity out of the home, so you've taken a loan against the value of the home and use that to help pay for their education, the property keeps going. That asset keeps doing the three silver bullets indefinitely until you go to sell that property. So I'm really liking that option and I kind of wish that I had started that a long time ago.
Matt: It's interesting, I think Jon, when inaudible and I, when we first started investing in real estate, and since you've come on board, we talk a lot about where will our properties end up or what will happen to them. And sometimes we talk about our kids take over a portfolio, will they be interested in this? And I think that, I love that Cherry and Erwin are thinking about their kids so far in advance. And I think this plan, I love how unconventional it sounds, but really when you break it down, just how much sense it makes. I mean real estate is obviously Erwin and Cherry's superpower. That's what they do on a day-to-day basis. So they feel like they know it well. They've seen the massive appreciation. My God, we've seen the massive appreciation within our portfolio in the seven or eight years we've had it.
So had we bought say a duplex, which seven or eight years ago was costing us $150,000 bucks and is today worth conservatively $500,000 bucks, $550, $600,000, that kind of appreciation, I think you'd be hard-pressed to beat in the stock market. And maybe even if you could, I think for me there's more a sense, there's always been more a sense of the tangible aspect of real estate versus the stock market over which I have very, very little control. So I like that. And there's also this very practical outcome where their kids could conceivably move into these houses should they ever need a house and can't get started maybe whether in school or after school as they're, again, so much of the new cycle around real estate is about the future unaffordability of housing for people and what that's going to look like, whether you call it attainable or affordable. So to know that your kids would have a place to get started, maybe it's not the fanciest place or the nicest place, that's okay. They have a place that they could call their own, I think is incredible. So unconventional, yes. But to me as a realist fellow real estate investor, I'm really excited about this strategy and it's one that I'd love to be able to execute myself for my own kids.
Kyle: I can't agree more. And I think there's even more hidden benefit here, which is this idea of responsibility that if truly, and I believe this is true, so correct me if I'm wrong, but I believe that Irwin and Sherry had said they actually were putting the homes in the name of their children or maybe in trust or something along those lines. So if you think about that, what that means down the road, when they do go on to post-secondary, they're pulling from an asset that is theirs and ultimately it will be their responsibility to either continue using that asset and paying it back through rental income through whatever they choose. Or they might choose that it's not for them. And you sort of touched on this, Matt, where we're like, we don't know if our children are going to want to do what we're doing.
I hope they do. I think it's a good plan, it's the right plan, but really what it does is it puts them in the driver's seat to have to make some pretty important financial decisions, which I'm going to guess that growing up, based on what I hear on the podcast and the things they do, they already have them in public speaking courses. And I'm guessing that throughout this process they're going to be helping to prepare their children to understand the decision. I'm guessing they're not going to control their decision. So if they choose one of their children chooses to sell or to get rid of that property completely, I'm going to guess that they're going to let them make that choice, but they're going to be knowledgeable enough to know what the consequences are in doing so, right? And maybe some of the restrictions that would be applied there or what they're giving up in the future instead of taking that asset on, taking the responsibility because it is responsibility.
But I just think of how beneficial that is versus it being a gifted, here's your education. It's very hard for that to be tangible. I know my parents, we were lucky enough to have some money left behind from my grandfather, and that was really helpful and they tried to make it very clear to me, when we pay this, this number's going to go down. All of those things still very abstract. But when they go, here are the keys and here is the deed and here is the title, all the documents that you have and you have a decision to make, do you want to put the next tenant in or is that too much work for you and therefore you're willing to sacrifice the potential upside? I think that learning lesson alone is such a great one. But again, this option would be likely for someone who already is involved in real estate in some way, shape or form, has investment properties or have had them before. It obviously wouldn't be the one you want to take your first property or to commit the first property to the savings plan here. But if you are that person, what a cool and creative opportunity financially, but also just from an education standpoint for your kids.
Jon: Yeah, I completely agree on the education standpoint and I actually, I think that's a great benefit of the final option we're going to discuss here today too, in teaching your kids about different vehicles of savings or different vehicles of investments or different vehicles of tools for your financial growth. And I think you can't start early enough when we talk about that with our own kids. So option two of the weird or the unconventional or the less known strategies, and I don't even know if anyone else would know this strategy. It's possible, Kyle. It's possible we're going to-
Kyle: Do you like I've authored this strategy?
Jon: I don't know. I don't know.
Kyle: Who knows?
Jon: We're going to call It the Pierce, the Pierce Unregistered Education Savings Plan. But this builds off the idea we talked about last episode on episode 20 on participating whole life insurance policies in using them for the infinite banking concept and building this tool that you can use for various purposes. So if you have not yet listened to episode 20 from this podcast, you might want to pause here, go back and listen to that episode so you gained some clarity around the tool that we're referencing. So in that episode, we kind of hinted or we actually secretly withheld the term life insurance policy as a vehicle for wealth building and purposely because we outlined all the benefits of using this to grow an asset that you can use for various purposes. And we just didn't want you to think it was just life insurance, even though it is a life insurance policy, we can use it in many ways.
And so Kyle's idea here is very interesting and it kind of builds on a couple ideas here. And one is if you start say, a whole life insurance policy designed for the infinite banking concept. So remember, go back and listen to that episode and so that it maximizes the cash value of the policy. And if you start that, let's say you start by contributing, say $2,000 a year into a policy like this, and then by the time they're ready for post-secondary education, this asset has grown. But where Kyle gets a little bit creative here is that you could decide, you know what, instead of $2,000, why don't I make it the $2,500? And now what I can do is I could contribute my $2,500 into the policy, but then I could take it immediately, borrow against that asset and take a policy loan of the $2,500.
So now I have it in my bank account because I took a policy loan. So now my asset is still there. This is the nice thing. We have not decreased the value of the asset. It's still going to grow as long as I continue to make my premium payments year to year. But let's say this year I take a loan on the $2,500 and I put it into the RESP vehicle. So whether I go the index route or whether I go in Kyle's trust fund route or whether I just keep it in cash with the way Matt is doing, I get my 20% from the government. And so now I've basically borrowed some money on from this asset. Now this asset has not, remember, decreased in value, it's still going to go up from year to year. And then I've now got this other asset growing because we've put the $2,500 over here and got free money from the government 20%, and then that's going to continually grow.
And if I do that year to year, I'm now building two assets at the same time. Now, I think I'll let Kyle address some issues because I think one big stumbling block for most people, this goes back to kind of thinking about whole life and using policy loans to do different things with in your life, is that when you borrow against the policy as a policy loan, you've created a hole which then says, "Hey, I've actually got this liability here that I now have to pay interest on. I have to pay interest to borrow that money, so I'm going to have to pay interest to put it over here in the RESP and I have to pay that back." And so now it's like, okay, even though I've got two assets growing and I got free money from the government, I got to also be concerned about paying that back to the policy so I can do it again next year and then I can do it again next year.
Kyle: Totally. And you did a great job kind of setting this one up. I do want to mention though, I'm going to call it a registered plan.
Jon: Oh, it's kind of both.
Kyle: Because it's taking advantage.
Jon: It's kind of both.
Kyle: It's kind of both, right? It is both because the whole life part is unregistered has nothing to do with the asset known as the growth for the education fund. So these are two separate things, but it's like you had said though, I really like it. It's like I've got this visual of two assets growing in tandem. Now there is some interest being paid in order to borrow against a policy, but there are so many different structures that you can use for this. So for example, I think one of the easiest ways, if you're listening and you're going, wait a second, I don't like this idea of interest, right? That's scary. One thing you can do is you can actually think of this, and it doesn't have to be all about the kids. It could be about you.
So what I mean by that is you can open this policy, it might be on your own life, maybe it's on your spouse's life, maybe it's on your children's life if you intend to actually pass this along to them. But all that matters is the policy is open and you can own the policy so it doesn't have to be owned by the child. So an easy way around this is that I would look at this as a good way to hit two birds with one stone. So if let's say you were considering you listened to the last episode, or you've heard other podcasts talk about the infinite banking concept and you're going, I really don't like, I don't know if I have the opportunity or if I have the budget or if I am ready to open up this other thing over here. Well, if you plan or you are paying into an RESP already, you can open up the policy, you can own the policy and you could dump the money in there first.
I'm going to argue that you're probably going to need like $3500, $3600 if you want to max out that $2,500 in the first year for the cash value. So just a heads up, I'll share my screen in a second to give our YouTubers kind of a look at one potential illustration that I've received myself. And basically the big goal here is, okay, if in year one I'm going to pay $2,500, if I could make that year one $3,600 to pay to the policy immediately borrow back 90% of the cash value, I'm going to share the screen now for our YouTubers to kind of see here up on the screen. I'll do my best to do some explaining as well. This is similar to the layout from the previous episode where I show the average compounded rate noting that year one is always super garbage because it's the startup year, but over time, your compounding rate increases and it actually erases the negative rates that you receive in the first few years.
If that's confusing to you got to go back to the previous episode, but you'll notice here in year one, we put in this policy $3,600 and you will then be able to borrow back the 90%. Ideally if you can start your policy a year ahead of your RESP, it's even smoother. It's even better. And then what you're going to have is this hole in the policy, right? You're going to have the policies growing. You haven't touched it, but you have a lien against it, you have a loan against it. And the strategy I would say is most beneficial is to then take next year's amount, that $2,500 and start paying it back monthly. Now, what that's going to do is that's going to close up the loan. So if you borrowed $2,500, divide that by 12 and you pay that back, maybe make it a little higher so that that interest is covered as well, and then by the end of that first year, you then are ready to put your next premium payment in and borrow that money back to pay the RESP, and then you continue to pay that monthly payment over time.
So really what you're doing is you're kind of playing here with the process in order to get two assets. Building the RESP eventually is going to get liquidated, right? It's eventually going to go to schooling, it's going to go to whatever. But ultimately at the end, if you do pay back every year, if you do pay this back over here, you're going to have a policy that you can then use for whatever you choose. Maybe you were thinking, I wanted to help fund schooling, so I'm doing RSPs, and then maybe add this other bucket over here that you're like, I want to help them with their first home purchase, or I wanted to help them with a larger than average wedding gift if they ever choose to get married or whatever your plan is for kids, you could do that here and you can get this other asset going while the RESP benefits are happening as well.
Now, the beauty is all your RESP money over here, you get to pick any of the other options we've discussed. All we're doing is we're layering in this other asset over here that's almost like on top or underneath it if it makes sense. But it actually doesn't matter if you choose Matt's strategy that he's doing right now, which is just letting it sit, or if you use what Jon had going on or has going on with a particular fund, or if you have what I've got going on, which is some sort of trust or whatever you choose, you're just finding another way to start creating this other asset over here. And again, is it going to cost more money out of pocket upfront to get this system going? Yes, but in the end, so for example, this particular policy, I'm going to argue, is not designed as optimally as I would like.
So I am going to be going back and I am going to actually be adjusting. The way I like to see it is if I can have base premium, I want the additional premiums or the paid up additions to be three times as great as the base premium. That seems to be the magic number for everything I've looked at. But when I look at this and I go, okay, this is for my son who is nine, by 18, that policy over here is worth $36,000 and change by cash value. I could then continue paying that policy and then by year 15, I'm at $60,000 ish, by year 20, by year. Oh my gosh, if I hand this policy off to him by 33, it's worth $134,000, right? So the beauty is here. If you've ever thought about infinite banking and you feel like there's a battle between, but wait a second, what about RESPs? Infinite banking is here. I have to pick one or the other. Maybe you can do both with only having to commit a little extra upfront in order to get both funded and both rolling. But again, making sure you understand the infinite banking concept and in particular participating whole life policies that are structured very specifically is going to be your key to having success in that area.
Jon: Wow, that one is super insightful and I think amazingly creative in a sense that allows you to do what you said, Kyle, two birds, one-ish stone, and I think it's a great option to build this asset for your children as well as fund for their education. So that was the fourth option. Let's do a quick recap here guys, and then we'll head to takeaways, but we'll go right back to the top. Option one for building your education fund was to open up an RESP, and we can fund it in different ways with different kind of vehicles. Could be just leaving it in cash, but the idea here is you're getting the grant money from the government and then you can either put it into index funds or say a target date fund. Option two was that same idea using the R S P container, but going a little bit more conservative and going with a trust account.
Option three was the buying the real estate property. This idea from Cherry and Erwin Szeto buying a real estate investment property and then using the equity in the home by the time your child has got to educational post-secondary educational age and that asset doesn't go away, it's still there and there's lots of advantages from that. And then option four we just outlined is kind of doing a two birds one stone and opening up a whole life policy, especially designed whole life policy so that you can practice the infinite banking concept as well as fund their education. So you've built an asset along the way, much you've built an asset along the way in the real estate side of things so that asset won't go away when it's time to use their education. You've kind of done both at the same time. So four ways folks to fund your child's education endeavors.
Matt: What really excites me about this episode is that all types of investing, we've really laid out a spectrum here. So from the very conventional and very accessible to the more unconventional and certainly the more advanced. And so I think as with all learning, we've scaffolded this really nicely. So this is almost an episode. I've got to go back and listen to myself a second time as I begin my entry point into intimate banking and whole life. That's one of the areas of learning that I'm doing right now. But the bottom line here, various entry points, whatever your background readiness and skillset is, bottom line is wealth creation. This is about planning ahead. This is about not sitting back and waiting for life's expenses to come to you. This is about getting out in front of it and about goes back to our big why, which for so many of us is our children, and finding ways to help them and set them up so that they can have that boost, that headstart to their financial future and their financial life. And as both of you have talked about perhaps some really great opportunities for learning and teaching with them about investing in finances along the way.
Kyle: Totally. Totally. And one thing too that I self-reflecting, the more I talk about different strategies, the more I realize that point there, Matt, that there's different approaches for different people. There is no one right way. I would argue there's even no one right way for you specifically. So whoever's out there listening, because I used to be the guy that was again, searching for the perfect rental property, and it was like I was on that mission, it was like, until I found the perfect property, I'm not going to pull the trigger. And the same is true with all kinds of other investments. I had this thought in my mind it had to be perfect. And the reality is, first of all, it'll never be perfect, but in a lot of ways is perfect for what if you've set yourself up for something that's going to be the best reward all the time.
If that's your vision of perfect, maybe the risk wasn't the version of perfect that you were looking for, and you start to realize. So for me, looking back and thinking about my early choice based on what I knew to go with the plan that I'm going with through that fund, through that trust, although I may have done it differently now, I'm happy that I have it because it is so sort of rock solid. It doesn't provide the biggest possible returns, but I'm happy I did it. I'm happy I did it back then. And to be honest, it's probably that safety that I need to have. I need to have more safe assets like that. And that's why even infinite banking and whole life policies is something that I'm attracted to as well, to go along with maybe some of my higher risk assets like real estate or the stock market or any of the other ones that you have, let's say, less control of. So keep that in mind when we say diversifying. You don't want to just aimlessly diversify, but you do want to make sure that you have enough there so that if one thing doesn't work out the way you thought it would, that you feel like you've got something in the other corner. And that's what that particular fund is for me and my children's education.
Jon: Hey, the three of us want to thank you for listening to this episode of The Invested Teacher Podcast. And if this is the first time you've listened to an episode, welcome. We want to welcome you. We are on a journey to build wealth and help people understand how to build wealth in different ways. Share this podcast with your friends, with your family so that they can also build their wealth. Again, if this is your first time, hit subscribe so that you can get notified when we have new episodes. And if you have listened to some of these episodes before, welcome back. And if you haven't yet subscribed, do that now. Also, you can find us on all social media at invested teacher,
Matt: All links, resources, and transcripts from this episode can be found over on our website. That's InvestedTeacher.com/episode21. Again, that is InvestedTeacher.com/episode21.
Kyle: Friends, I believe Thursday this week is our next call with an interested joint venturer who would like to learn more about the next opportunity to potentially get in on an investment. So if that sounds like you want to learn more about some of the things that we're up to, how you might be able to take advantage of them on your own, or maybe there's an opportunity or we know of an opportunity that we can point you towards, head over to InvestedTeacher.com/jv and you'll be able to learn a little bit more about that. Again, InvestedTeacher.com/jv.
Jon: All right, folks, class dismissed.
Matt: Reminder to all our listeners, this content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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