The behavioural finance guide to smarter RESP savings
Saving for your child’s education through a Registered Education Savings Plan (RESP) is a smart move, but our emotions and mental habits can sometimes lead to less-than-ideal decisions. Behavioural finance helps us understand these common money mistakes and how to avoid them.
Loss aversion: Fear of losing money
People hate losing money more than they enjoy gaining it. This can make parents overly cautious, keeping RESP funds in low-growth investments, such as GICs. While safety is important, some growth (for example, using stocks) can help beat rising tuition costs.
Herd mentality: Following the crowd
Many parents copy others’ RESP strategies without researching their own best options. Just because friends choose high-risk or low-risk investments doesn’t mean it’s right for you. We help to customize your RESP product based on your child’s age.
Overconfidence: Thinking you know best
Some people believe they can “beat the market” and take unnecessary risks, like investing RESP funds in a single stock. A diversified mix of investments helps protect your child’s future.
Anchoring: Sticking to the first number
You may hear that contributing $2,500 per year is ideal for maximizing the Canada Education Savings Grant (CESG). If you can’t afford that, you might avoid contributing altogether. But even small amounts add up over time, and power of compounding returns can not be underestimated.
Mental accounting: Treating money differently
Some parents see extra cash (like tax refunds) as a “spending money” instead of “RESP savings”. Consider directing unexpected money into the RESP to maximize grants and long-term growth.
Recency bias: Thinking recent trends will continue
If the stock market is rising, you might assume it will always go up and invest too aggressively. If it’s falling, you might avoid investing altogether. A steady, disciplined long-term approach would be a much better option.
Better RESP decisions
- Start early – More time means more growth.
- Balance safety and growth – invest in a diversified Target Date RESP product.
- Stick to a plan – Avoid emotional decisions.
- Maximize grants – Even small contributions help.
Final thoughts
RESPs are a powerful tool, but our emotions can get in the way. By understanding human behavioural biases, you can make smarter choices and give your child a strong financial foundation for the future!
