Every year for the first two months, investors flock to their financial advisors and financial institutions to make their RRSP contribution.
As we pass the end of the RRSP season, consider making your contributions on a monthly basis and avoid this mad, year-end rush. Financially, there are a few reasons why this makes sense:
- Your money starts working for you sooner. Think about this. You and your twin invest $5,000 per year into your RRSP. You put in $416.67 every month for 10 years while your twin invests $5,000 every year at the end of the year in RRSP season for the same 10 years. At the close of this period, by investing monthly you will have $85,022 compared to your twin only having $79,687. Given more time the spread gets bigger and bigger.
- Dollar Cost Averaging reduces risk of bad timing. By investing on a monthly basis, you will be taking away the highs and lows of investing and lowering your average buying cost.
- What does this mean? When you buy investments that fluctuate, buying once means you risk bad timing. You may buy everything at the low price. You may also buy everything at the highest price. By spreading the buying over time, you will buy more when it is cheap and buy less when it is expensive. Sounds pretty logical to me.
- You pay yourself first. By paying yourself first through monthly deductions from your bank account, you increase the likelihood of saving more throughout the year.
Human nature says most people are not disciplined enough to ensure enough money at the end of the year. There’s always an excuse why you don’t have the money to invest (vacation, fix the car, the furnace broke down, we needed that new computer, the kids, etc).
One last tip to avoid the big RRSP rush next year: take your tax refund and instead of spending it, put it directly back into your RRSP. You will be amazed at how prosperous this strategy will become over time.