Saturday, March 8, 2008

resp in net worth, the decision

This is a fairly long post, but if you track net worth and plan to have children, or have children already you might be interested in reading on...

Recently I've pondered and posed this question to readers:
Do I include our RESP balance as part of our net worth?

Thanks for all the great comments on this. The verdict is certainly still out on whether or not one should include the balance. Commenter's were split on the issue. Here are some of the points that were raised:

The 'Against' Case:
Scott noted:
The intention of the savings plan is to fund your child's education and as such it is his asset. If the funds eventually are rolled into your own RSP's due to them not being used for education it should be considered a windfall because that's really what it is. It was never part of your intended asset base.

Luc-Roc said:
However, you could always create a separate "Family Net Worth" report and add your RESP in that report.

Dividends4Life commented:
One differences though is that my plan under U.S. law is irrevocable - it is theirs at age 18.

Middle Class Millionaire suggested:
However, other than to satisfy the technical definition of networth I don’t think there is really any benefit of including it. When using networth to gauge your progress you’ll probably subtract it why include it?

The 'For' Case:
Sarlock explained:
Whether I had an RESP or not, I would be funding a significant portion of my daughter's post-secondary education and this would be part of my annual expenses during those years. The fact that I am putting away money now toward this future expense just means that I am allowing myself 18 years to spread this expense out instead of having to incur it at the time which would have a much heavier impact on my savings when those days arrive. Thus, I have included it in my personal net worth computations - with a caveat. I have only included the amount that I have put in to her account, not the amount the governments have contributed nor any amount of growth.

pitz said:
RESP is an asset that, in bankruptcy, is the property of *your* estate. So its yours, if the creditors come a'calling

DH noted:
I have and believe as above that i will be helping fund the education and this is just keeping future dollars in my pocket. It is an asset after all? Do you take out your wife's RRSP because it has her name on it and is technically hers if she leaves you? Besides its money you can remove in a worst case scenario if needed (I personally know people who've done this!)

Q from Surrey, BC commented:
I have also included RESP in my networth because it is my money being saved up. Networth is an indication of how you are doing so its unfair to leave the RESP amount out.

I can't emphasize enough how insightful these comments were, and how much they aided me in making my decision. Before I posted about this I really had no idea whether I was going to include it or not. I have decided now after reading these comments and thinking more about it that I am going to include any RESP balances in our net worth. I think at the end of the day you have to think about the RESP as a gift. A good analogy is the following:

Imagine you planned on buying a car for your son for graduating university. When your son is 16 years old you begin to save money in an investment account for the car. When completing your net worth statement a few years later when you have accumulated $12,000, do you include the money? I would say the answer is a resounding 'Yes'. Just because an asset is intended to by used for a purpose in the future that involves it leaving your hands, doesn't mean the asset didn't exist in the first place. Points readers raised about the fact that if we did not save the money now for the education help, I would be likely shelling it out in the future which would take away from our net worth growth at that time, were good ones.

A few caveats:
  • I won't include any government CESG grants, because they were never our money and never could be our money in the future.
  • I will include any market gains that the money garners.
  • I will mentally deal with the huge reduction in net worth at the time our son begins school, by considering the fact that we had always decided to help with the education, and we could have done it at the last minute, which would have reduced our net worth by an equivalent amount. Hopefully by the time this all transpires, our net worth will be relatively large, and the lost money will not be significant.
  • A positive I see with including the balance, is the fact that money we contribute to the account will not only help our son someday, but it helps and encourages our net worth and financial progress now.


Preet said...

I agree that it should be included based on similar rationale to your own. Basically, if you used part of your investments for the consumption of depreciating assets, a vacation, etc. - you would have to exclude that from your net worth if you didn't include RESPs in your net worth.

Just because you don't spend the money on appreciating assets in the future makes no difference. In the end, it's your money to spend how you want. You could buy a cottage, vacation, car for someone, education for someone, etc.

I also agree with you in theory that you shouldn't include the CESG, but it's academic. I would continue to include it in the net worth calculation just to keep things simple.

Interesting comments, and great post! Have a good weekend.


Four Pillars said...

Interesting question.

I think you made the right choice - Pitz' comment is dead on.

I agree with Preet - count the CESG.

If you are going to get that precise then you should also consider the various taxes to be paid if the RESP is collapsed.


MG said...

Thanks for the comments. Although negating the CESG from my net worth is academic, I don't think it will be that difficult to take it off. Technically the money coul never be ours. Taxes, etc. on all investment accounts can not be ours either but I feel discounting for taxes would just be cumbersome and probably not accurate anyway.