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Investing

What Benjamin Franklin Taught Us About Compound Interest

We can all learn something about saving and investing from Benjamin Franklin. Upon his death, in his will, he donated one thousand British pounds to both Boston and Philadelphia to be used to help apprentices to start their own businesses. The interesting part of the request was that he wanted the money to be invested for 100 years. After the 100 years was up, the Philadelphia investment had grown to $172,000.00 and Boston’s fund ended up with $2.3 million.

This goes to show you how important a role compounding interest can play in your investments. The more time you have to invest, the more your money will be able to work for you. As well, this lesson from history shows us the importance of choosing investments wisely. Obviously Boston did a lot better job of selecting investments than did Philadelphia.

If you are unsure of what you are currently investing in, or if you haven’t started to save for your retirement, I would encourage you to book an appointment with a Financial Planner at your local financial institution and build a strategy for retirement and your other savings goals. The sooner you make a plan and stick to it, the better off you will be.

For more detailed information on the full story about Benjamin Franklin, check out this article.

January 24, 2010

Investing

How Much Should I Contribute to my RRSP?

We are all becoming more and more aware of the importance of saving for retirement. Unfortunately, many people have no idea how to go about it. Some people say it’s best to try to max out your RRSP (Registered Retirement Savings Plan) contribution space each year. I disagree. Instead, I recommend contributing enough to take advantage of a lower tax bracket, and then contributing to a TFSA (Tax Free Savings Account) or a non-registered investment account (IA) to supplement additional retirement savings.

I say this because the main advantage of contributing to an RRSP is the tax deduction and the tax-deferred growth. If contributing $4000.00 in a given year brings you to a lower tax bracket, there is no need to contribute anymore than that since you have already maximized the tax benefits.

On the other hand, that doesn’t mean that you shouldn’t be building up your retirement savings in other ways such as by contributing to your TFSA (up to $5000 of additional contribution space is added each year) and/or contributing to a non-registered investment account.

Once you’ve determined how much you need to contribute to your RRSP, if you still have funds remaining that can be used for retirement savings, I would suggest building up your TFSA, because you don’t have to calculate your capital gains or losses, and more importantly, you don’t have to pay tax on your earnings. It is also much easier to withdraw from a TFSA if the need arises.

Before deciding on how much to contribute to your RRSP, I would highly recommend checking out http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html on the Canada Revenue Agency website to see exactly how much you should contribute to maximize your tax benefit. After that, if you still have room in your budget, consider putting some money into a TFSA and then an IA and set yourself up for success.

For more detailed information on RRSP related topics, check out my RRSP Page. You can also check out my e-book about RRSPs.

November 27, 2009

Investing

The Beauty of Dollar Cost Averaging

Dollar cost averaging is what you are doing when you contribute to your investments on a periodic basis such as monthly or biweekly, rather than putting down a one-time lump sum. The advantage to dollar cost averaging is that you don’t have to worry about “timing the market”. Instead, you buy units or shares when the market price is both high and low. Over time, this results in a lower average unit price then if you made a lump sum contribution.

You may be doing this inadvertently but many sophisticated investors use this technique as well. Dollar cost averaging helps you to have a positive perspective even when the markets are down, because it means that you are buying units at a cheaper price. It’s important to note, however, that dollar cost averaging is only helpful when you are investing for the long term.

If you are interested in learning more about dollar cost averaging, check out the article at this link.

November 9, 2009

Investing

Start Saving Now For Your Children’s Education

Do you hope that your children will one day get a post secondary education? Are you planning on helping them out with funding at least part of it? If so, I would highly recommend that you begin saving now. For Canadians, a Registered Education Savings Plan (RESP) is a good option.

When you contribute to an RESP, the Canadian government will provide grants and bonds that will aid you in helping to save for your children’s education. Although your contributions to an RESP are not tax deductible, the earnings are tax sheltered until withdrawn and are taxable to your children at a much lower tax bracket.

The earlier you start saving, the better. To illustrate this, let’s imagine that you want to fund 4 years of post secondary education for your child. Let’s assume that in 2009 it costs $7000 per year for tuition, and that your child will begin university at age 18. Taking into account inflation, if you begin to save within an RESP when your child is first born, you will only need to tuck away $80 per month for 18 years. That works out to $17280 out of your pocket.

With the same scenario as above, if you begin to save when your child is 5, you will need to tuck away $122 each month for 13 years, which works out to $19032 out of your pocket. If you start when your child is 10, it will cost $214 per month for 8 years, costing you $20544. And, finally, if you wait until your child is 15 to begin saving, you would need to come up with $676 monthly for 3 years, which works out to $24336. So, as you can see, the later you start saving, the more burdensome it will be and the more money will need to come out of your own pocket.

In a previous post I wrote about the importance of indexing your investment contributions to inflation, meaning that it’s a good idea to increase your contributions by at least 3% each year. The numbers below show the savings you could enjoy if you were to do so.

START AGE FIXED WITH 3% INCREASE/YR

0 $80 $64

5 $122 $103

10 $214 $193

15 $676 $656

The time to start saving for your children’s education is now. The sooner you begin, the easier and more manageable it will be to help your children to get a good start at a promising future. For more information on RESPs, check out this link.

November 7, 2009

Investing

A Tip That Will Help Your Investments Grow

Here’s a quick investment tip for you that will help your investments grow. When you set up preauthorized payments towards your investments, it is really important to make sure that you increase your contributions by at least 3% each year to keep up with inflation. Although you may think it’s not necessary, the impact on the growth of your investments is significant. All you need to do is contact the institution that holds your investments once a year and ask them to increase your contributions by a few dollars.

To illustrate my point, if you contribute $250 each month into an investment account for 30 years and you increase your contributions by 3% each year, in 30 years your investment could be worth as much as $341,179. However, if you contribute $250 each month for 30 years and do not increase your contributions to keep pace with inflation, your investment will be worth approximately $243,927, which is almost $100,000 less!

Although inflation is often hard to notice from one year to the next, it becomes very apparent over a timeframe of ten years or more. For example, what cost $100 in 1998 would cost $131.52 in 2008. Also, if you were to buy exactly the same products in 2008 and 1998 they would cost you $100 and $77.68 respectively.

You can find more examples and get a better understanding of the effects of inflation over time by checking out the Inflation Calculator at http://www.westegg.com/inflation/.

Don’t forget to give your financial institution a call in order to increase your contribution amounts. You won’t even miss the extra couple of dollars you contribute, and your investments will grow a lot more as a result.

October 30, 2009

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