Start Early, Invest regularly, and Seek Higher Returns

There are three main rules to investing. Start early, invest regularly and seek higher returns. After that, you simply need to be aware of the factors that can affect your plan, both positively and negatively.

Starting Early

The ultimate financial principle is called compounding and it’s the one that everyone can take advantage of. It enables even the smallest amounts of money to grow exponentially over time.

The numbers in the table below assume: You invest $2000.00 per year for 10 years, starting at age 25, you stop investing at age 35.
Your twin invests $2000.00 per year starting at age 35 and invests $2000.00 per year for 30 years, stopping at age 65.
The assumed annual rate of return is 10%, all income is reinvested, and sheltered from tax.

You accumulate $556,197.00 your twin accumulates only $328,988. You invested a total of $20,000 while your twin invested $60,000.

Invest Regularly

Take advantage of dollar cost averaging. This approach means you avoid trying to time the market or pick the best time to invest. Because of the cyclical nature of the economy, even the pros aren’t always sure when to invest, so by investing on a regular basis, you can do better then guessing.

Basically, this concept means you average out the highs and lows of the market by contributing regularly over a long period of time, regardless of where the market index happens to be.

When prices are low, you will buy more units. When prices are high, you will buy fewer units. Over a period of time, the result can be lower average cost per unit, which will automatically boost your chances of a higher return.

Seeking Higher Returns

Achieving the highest rate of return your risk tolerance will permit is also key when it comes to investing. Even one percent can make a difference over the long term. You owe it to your self to make your money work as hard as possible for you. Below is an example of $5,000 invested at the beginning of each year for 30 years, how it will grow at various average annual compounding rates of return.

Other Factors to Consider for Your Financial Plan

Registered Retirement Savings Plans (RRSPs)

Canadians are some of the highest taxed people in the world, its important you don’t pay more tax then you are legally required to. One way to grow your money is by reducing taxes and enabling your investments to grow on a tax deferred basis by placing them in a RRSP. A RRSP should be the base of every person’s investment plan. Keep in mind that if you withdraw any of the money you’ve contributed to your RRSP, you will be taxed at your marginal rate.

Two investors save $15,500 a year for 25 years. One of the investors saves outside an RRSP while the other investor invests inside their RRSP. Assuming the investment is made at the beginning of the year and the rate of return is 7%. The graph below shows the after tax difference on the accumulated values. The RRSP after tax assumes all money in the RRSP is withdrawn in one lump sum. Marginal tax rates are assumed to be 40%

What this shows you is that if you saved in RRSPs you would accumulate substantially more money, and even if you withdrew all your money at one time from the RRSP you would still have more after tax money then you would if you saved out side of your RRSP.

Investors that do not maximize their RRSPs each year accumulate their contributions. Check your CRA notice of assessment to see how much you can invest in RRSPs for 2004. Multiply the number on your notice of assessment by your marginal tax bracket to see how much tax you will save.

For example, if you have $25,000 contribution room and you make the contribution you could save as much as $10,750 in tax, while at the same time getting closer to your retirement goal. This tax savings can be used to pay down mortgage or reinvested again in your RRSP.

How Much Money Will You Need to Retire?

To receive an annual income, during retirement, before tax (in today’s dollars)

The numbers assume you plan to retire at age 65. Your retirement lasts 20 years. The annual inflation rate is 3% from now through your retirement. Your investments grow at an annual average compounding rate of return of 8% during your retirment.

Empower Yourself

Most people suffer stress. One of the major causes of stress is your finance’s. Just as you would go to your doctor for medical advice or seek out experts in exercise and dietary fitness, you should get advice from your financial planner.

It’s important that you invest your time right now to create a financial plan. You will find it’s time well spent because you will be taking a major worry out of your life by taking the responsibility to plan your financial future. Put balance in your life, and relieving one of the major worries from your life. A lot of people retire and accept what they get, others choose to take control of their retirement plans and retire on purpose the way they always thought they could.

Parts of this article were taken from Appreciating Your Net Worth written by Aim/Trimark Mutual Funds. All returns are for illustration purposes only, returns are not guaranteed.

This article was prepared by Terry Fay who is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst*. The views (including any recommendations) expressed in this article are those of the author alone, and they have not been approved by, and are not necessary those of Dundee Securities.

The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed have not been approved by and are not those of DundeeWealth Inc., its subsidiaries, or its affiliates, including, but not limited to Dundee Securities Corporation, Dundee Private Investors Inc. / Ltd., Dundee Insurance Agency Ltd., Dundee Bank of Canada and Dundee Mortgage Services. This website is not deemed to be used as a solicitation in a jurisdiction where this Dundee representative is not registered.

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