There will always be a reason not to save or invest. It's called the lifestyle creep and I have talked about it on this blog before. You have bills to pay, you have a trip to take, you (or your spouse) are earning a lower wage on maternity leave, you have higher childcare expenses, you are only working part-time while the kids are young, you are focusing on paying off your house, your car, your credit card, or maybe you just want to live your life, your finances are not your main focus at this point.
Please view the following examples below as motivation to start now, catch up, and pay yourself first. You will not regret it. Trust me.
If you are 30 years old in 2017 and have been working for the last 10 years or so, depending on your annual salary you could contribute as much as 18% of your annual salary (for as many years as you have been employed) to a maximum of $25,370 annually for 2016. To check you RRSP contribution limit go to the CRA website.
So…let’s say you begin contributing to your RRSP NOW.
Let us estimate you are making $40,000 a year and you decide starting tomorrow you will put away 10% of your bi-weekly pay-cheque into an RRSP – so $155 per cheque (approximately).
In 30 years (you would be 60 years old) estimating a 5% rate of return, your retirement savings should amount to $274,645 – you would receive a tax-refund for 2017 of $1,118 – if you chose to re-invest that into your RRSP your total value in 30 years would be $335,582 – not a small nest egg to help support you when you stop working.
Now let’s just wait five years to start putting that money away – because, you know, life. That amount before re-investing would equate to $197,295 and with the refund reinvested $243,108
A five year difference will cost you $77,358 - $92,474 (depending on whether or not your reinvest your tax refund). You may argue that you put five more years of contributions in too – yep but the difference in contributions is only $20,150 so you are still missing out on $57,208-$72,324 of growth on your investment by just waiting five years to start. (RRSP Calculations performed on the RRSP Illustrator at mackenzieinvestments.com)
Everyone who was 18 as of January 1st, 2009 (when the TFSA was first introduced) has up to $52,000 worth of contribution room as of January 2017.
Maybe you are in a lower tax bracket so it just doesn’t make sense to contribute to an RRSP at this time – so instead you put the $155 bi-weekly into a TFSA – allowing that TFSA to grow for 30 years at a 5% rate of return you should accumulate $279,813.
Waiting five more years to start contributing and your total is $200,216 – a difference of $79,597 ($59,447 in growth, after contributions) (TFSA Calculations performed on the Compound Interest Calculator on Getsmarteraboutmoney.ca)
Every parent/grandparent/guardian can contribute up to $50,000 into their child’s RESP. The government will match your contributions by 20% up to $500/year or $1,000/year if you have some catching up to do - to a maximum of $7,200 in Canadian Education Savings Grant (CESG). Learn more about RESPs here and here.
So starting your child’s education fund today and contributing $2,500 annually (+ $500 in CESG) in 18 years, at a 5% rate of return your child’s education fund should equal $82,825.
Waiting to start until your child is five years older, contributing $2,500 annually (+$500 in CESG) after 13 years, at a 5% rate of return your fund should equal $53,824. You’ve contributed $12,500 less, but you’ve also missed out on $16,501 in growth on your investment over those five years. Waiting even longer will further reduce your potential growth - however, you can still contribute to a child's RESP and obtain the Canadian Education Savings Grant right up until your child turns 18. (RESP calculations performed on the RESP Savings Calculator on Getsmarteraboutmoney.ca)
So…the point of this entire post is that TIME DOES MATTER. QUIT MAKING EXCUSES and START SAVING TODAY. Your procrastination could cost you $16,500 for your child’s education, $60,000 in your TFSA and up to $72,000 in your retirement savings!!!
If you have any questions about setting up an RRSP, TFSA, RESP or paying yourself first, don’t wait five years, get in touch today.
Brooklyn Scott is a Financial Advisor/Mutual Funds Representative for Lewis & Jones Group/Desjardins Financial Group/Desjardins Financial Security Investments Inc. in Killarney, Manitoba.
Mutual funds are distributed through Desjardins Financial Security Investments Inc. For insurance products, Desjardins Financial Security Investments Inc. acts as a national insurance brokerage agency.