April 21, 2021

Author: The Link Between

Why do we invest our money? Well, one of the key reasons is compound interest – meaning, the money we invest today has the ability to grow if placed in the proper investment accounts. The idea is that if we invest $100 today at a 5% annual interest rate, it will grow to $105 in a year. If you then take that $105 and re-invest it yet again at 5%, in another year you will have $110.25, and so on. Making our savings earn more money is the fundamental reason why we invest and by increasing our savings via monthly, pre-authorized deposits, we can help increase our savings on an even larger scale.

Let’s see an example outlining the power of compounding interest by using a monthly pre-authorized withdrawal from your bank account, within an RRSP or a TFSA:

(From Mawer Investment Management’s How Compound Investing Works, illustration as of April 27, 2020)

As you can see from the table above, by investing an initial $10,000 and adding $500 per month (that’s $6,000 per year) at a 5% rate of return, your investment has tripled within 40 years. Not too bad at all.

Now let’s add a little twist – try to increase your contributions by $20, $50, or $100 a month on an annual basis. Just like your cost of living increases by 1% to 2% every year, your savings should do the same because, let’s be honest, $1 dollar of goods today will not be worth $1 dollar of goods in a year.

Let’s see what this additional increase can look like. This chart illustrates the benefits of increasing your savings on an annual basis, partnered with the power of compounding interest; the results are impressive!

Assumes you increase by $20/month, $50/month & $100/month once a year for 30 years and that you have enough TFSA contribution room for the above increases.
(From A Wealth of Common Sense, illustration as of November 13, 2020)

In the above scenario, the initial investment is $6,000 or a one-year max contribution into a TFSA. Based on the assumption that you are planning to raise your monthly pre-authorized deposit from $20 in year one, to $40 a month in year two, and so on, you can see that in 30 year’s time, you would save approximately $260,000 with a 7% rate of return. By increasing that annual monthly deposit to $100 per month, you can save as much as $1.3 million! 

A mortgage, car payments, school tuition – we all have expenses and retirement can look different for each of us. Increasing your savings by $1,200 a year is a little high on the savings spectrum and may not be an option for everyone. However, $240 savings per year may be doable! The truth is that your retirement success is based on how much you save, so if you can start saving today, even a little each year, your savings will grow, giving you a few extra dollars to spend in your retirement and the peace of mind knowing you are secure. 

Posted ON Mon, October 25, 2021 at 11:26:53 am MDT    Comments (0)
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Mutual funds, approved exempt market products and/or exchange traded funds are offered through Investia Financial Services Inc.

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This blog was prepared by Jason Desaulniers who is a Investment Funds Advisor at Excalibur Executive Planning Inc., a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this presentation comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability.

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