RRSPs, TFSAs and Overall Investing

RRSPs, TFSAs and Overall Investing


As we approach the crazy RRSP rush deadline for another year I can’t help but wonder why so many investors are doing a lump sum deposit rather than monthly deposits. Contributing monthly to either an RRSP or TFSA by way of an auto debit plan is both painless and called “paying your-self first!” RRSPs or Registered Retirement Plans are long-term savings vehicles to save money for one’s eventual retirement. They shouldn’t be used as a piggy bank you dip into for emergencies. If you dip into your RRSPs to cover day-to-day expenses, the money withdrawn becomes taxable and you’ve lost that contribution room forever. If you’re using your RRSP as a piggy bank you should consider investing into a TFSA, as you don’t face any tax triggered with withdrawals, plus if you have the funds you can put it all back in the following year without losing contribution room.  A TFSA is a better option for an emergency fund. I have always systematically contributed a set amount every year based on a set percentage of my annual income. This has allowed the value of my retirement savings to increase with tax deferred compound interest year after year.

If you are looking to borrow to invest in RRSPs in February, consider two things, 1) RRSP loan interest isn’t deductible.  2) It may also be the wrong time to invest in the market. This is where monthly contributions balance out the volatility in the markets as opposed to yearly deposits. Automatic deposits work best and eliminate having to remember to do so every month. It’s all about developing the habit of savings no matter what process you choose.

Now, let’s talk about the power of compound interest with savings…. consider $100 invested monthly since 1950 into small cap US stocks and left to grow… it would be worth over $500,000 today. Yes – there would be some volatility along the way, but this also illustrates what Einstein commented on that “Compound interest should be the eighth wonder of the world, as he who understands it – earns it and he who doesn’t – pay’s it.”

It all comes down to “do you want to live to work or work to live?” Don’t get trapped in what we call the “renting your lifestyle” syndrome, working to make payments on things that you borrowed the money to buy, rather than saving the money first. There are definitely times that borrowing makes sense; borrowing for a house or to invest. When thinking of borrowing, think about your “Wants verses Needs.” Wants are all those things you crave beyond covering the cost of clothing, food, housing, transportation and companionship.

Today we live in a consumer society, disconnected from our money. Just think what your reaction would be if you had to go to the bank every month to pay your mortgage or to the local car dealer to make your vehicle payments with $20 bills! Credit or debit cards make it even easier, just insert, slide or tap and your payment is made!

I’m not advocating anyone becomes a miser, but too many Canadians have lost control of their spending and are working to make payments, often carrying balances over on credit cards at 18% to 22% annual interest (my definition of highway robbery) So if you’re continually “running out of money before running out of month” please seek out a trusted financial professional to help get you back on a firm financial footing and begin developing the habit of saving.
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