The worst financial mistake you can make is believing that Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) are something to look into when you are a little older and more able to set some money aside. The fact is, you don't use these accounts for saving at all, you use them for investing. Your retirement fund could grow to seven figures, even if you only contribute a fraction of the allowable yearly maximums. They also come with huge tax-saving benefits.
A lot of people get discouraged by the sheer amount that you are allowed to contribute to these registered accounts and the mere pittance they may be able to come up with — don’t fall into that mindset!
If you make 60,000/year from your job, you could contribute over $10,000 to your RRSP and another $6000 to your TFSA every year. Considering you are only going to have about $45K in your jeans after taxes, finding a spare $16K would require almost 40% of your pay-packet!
The good news is that your yearly contribution limits can be carried over and as you grow older (and theoretically have more disposable income) you can catch up. The bad news is that playing catch up isn’t going to happen unless you are very disciplined with your spending. Sure, you may earn more, but you will spend more... kids, cars, a house, vacation — even the family cat is going to cost you $800 year and he may hang around for 20 years!
That extra disposable income you were envisioning may not materialize until you are in your mid 50’s — if ever! You need to scrape together whatever investment savings you can now; even saving just 5% ($200/month) of a $60K salary would make a huge impact.
Putting off getting started is going to cost you way more than you ever imagined in lost investment returns. Ignore the pitiful interest rates you see on bank savings accounts, holding cash will actually cost you money at current interest and inflation rates. However, the average annual return on many stock indexes (S&P, TSX, DSJ) over the past 40 years is around 9%. If you do a little math, you are soon going to realize that even on a relatively small investment of $200 month, the difference between starting when you are 18 versus starting at age 28 is jaw dropping.
Investing $200/month from age 18 to 65 at 9% would give you $1,504,471. The same $200 at the same rate from age 28 to 65 would yield just $620,102. Sure, you would be contributing $24,000 more over that extra 10 years, but your nest egg at 65 would be almost $1,000,000 higher — more than enough to keep you poolside at a nice resort in the tropics a few months every winter while those “late starters” are stuck in the snow.
There are plenty of rules, regulations and strategies to consider and as the March 1 RRSP contribution deadline looms, the media will examine and re-examine every TFSA vs RRSP angle and option known to man. You need to understand the basics of how they work, but the goal for the vast majority of us is simply to put something, anything into one (or both) of these accounts on a regular basis and start investing — you can’t go wrong!