Planting Seeds of Prosperity with RRSPs and ETFs

As spring approaches and the weather turns warmer many of us are preparing our garden. Investing money is a lot like planting a garden. Both tasks require dedication, perseverance and attention to detail. The nice thing about investments is that they can grow in several different ways. The key is to maximize how your money can grow. Take the simple example of investing in a registered retirement savings plan (RRSP) to see the many opportunities for growth:

1. Invest in an RRSP

   When you contribute to an RRSP you can deduct that contribution from your taxable income. Since you’ve already paid tax on that money you set yourself up for a tax refund when you complete your yearly taxes. That tax refund is free money for you to invest into next year’s RRSP which in turn sets you up for the following year’s tax refund.

2. Purchase Exchange Traded Funds

   Inside your RRSP you could opt to purchase an exchange traded fund which is highly diversified, low risk, and has low fees. Their are several funds which meet these criteria. These funds have a fee set at 0.2% which is immensely lower than the average mutual fund set at 2-3%. Lower fees means more money stays in your fund to grow and compound over time.

3. Almost Guaranteed Long Term Gain

   Exchange traded funds have a share price set daily by buyers and sellers on the Toronto Stock Exchange. Historically the total return from the stock market has been on the order of 8% and you can expect a similar rise in your share price over the long term (20+ years).

4. Reinvest Your Dividends

   These funds (ETFs) also offer a special payment called a dividend. These are payments made to you for every share you own, typically on a regular schedule (monthly or quarterly). You must specify that you want your dividend reinvested into buying additional shares of the fund. That means that when you get paid your dividend you buy more shares of the fund and the amount of shares you own is constantly increasing. This is the concept of compound growth in its simplest form.

5. Invest Automatically

   One of the best ways to save is to make it automatic. You specify a specific monthly amount to purchase shares in your fund using an automatic deduction. When you get a raise or bonus simply increase that monthly deduction amount to increase your savings without reducing your lifestyle.

Start Early

The earlier you start the saving process the more time your money has to grow and compound. An RRSP gives you the benefit of a tax refund to reinvest into your future savings. An exchange traded fund creates savings from low fees leaving you more money to grow. By making automatic monthly contributions you remove the willpower needed to force yourself to put money aside every month. Long term investing gives you an excellent opportunity to realize the historic returns from the stock market on the order of 8%.

As your lifetime income increases, consider increasing your savings rather than increasing your spending.
Just as patience and effort put into caring for a garden can result in a bounty of fresh produce, safe and diversified low fee investments will grow and compound in the long term. When you choose to retire you can reap what you have sown.

In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.