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The genius of compound investing

How saving small when you’re young can guarantee huge payoffs down the road

How to end up with one million dollars

RRSPs, TFSAs, ETFs. It can be overwhelming to try and understand everything regarding money and retirement but there is a simple strategy that works.

If you can’t be bothered to invest more than 20 minutes on managing your savings, but you do know how important it is to save for your future, you might want to consider setting up a very simple investment plan. All you have to do is call or walk into your bank, set it up, and have a certain amount of money come off your paycheque each month.

Treat your investments like a rental building

Income investing is when you buy products that pay you for owning them. You could buy investments that pay money back to you each month, quarter or year. It’s like buying a rental building and harvesting the rental income each year versus opening a tech company and expecting to sell it later for lots of money. Once you open an RRSP account, you might want to look for an investment that will grow over time. Your banker or investment advisor can help get a great investor that works for you.

You can do some investment research before you chat with your banker or investment advisor. Google or look on Globefund.com for investments that might be good for you. My favourite are sites that show the return and compare those investments to other competitors. Fees are a big thing to watch. Generally ETFs (Exchange Traded Funds) have lower fees than other investments but be sure to shop around and do your research.

Set it and forget it

It is in fact possible to make up to a million dollars in the long-run, with very little effort if you just set up an RRSP and buy a good investments inside of it. Say you set up a $400 semi-monthly automatic withdrawal program. Each month $400 comes off your pay cheque and buys into your RRSP. Too much money? Well, if you can’t afford that much start off small. Even $100 a pay, twice a month, will get you around $200k in 30 years at a conservative six percent return. The stock market over time has returned around six to 10 percent since 1900.

The genius of compounding

You can see that contributing money early and letting it grow will really pay of for you and your retirement goals if you start early and leave the money invested to grow over time. If your great grandmother had invested $1,000 in 1900 it would be worth a SWEET $31 million now. That’s the genius of investing. If it is left invested in the stock market, and the market performs roughly the same as it has over the last 113 years, you can in fact make millions, or at the very least, retire in comfort. Many people think that to afford retirement, you have to actually save up hundreds of thousands of dollars. That’s clearly not the case if you’re smart about investing. Compound investing does all the work for you.

Invest in an RRSP

The government has special saving accounts that allow your money to grow over time tax free. If you don’t invest inside an RRSP you’ll have to pay taxes on your gains each year and it’ll subtract from the stronger growth that happens when it is allowed to grow tax free.

There is nothing guaranteed in life but death and taxes as the saying goes and the government taxes your investments when you start taking the money out in retirement. That’s how they can afford to let your money grow tax free over time.

You won a free trip too

The extra benefit to this plan is that by placing $2,400 into your registered retirement account each year you will also be getting a tax rebate of around $700-900 if you are in the 30 percent tax bracket and depending where you live. That is a pretty good vacation fund every year for 30 years until you slip into your cozy retirement account. The benefits to this plan go on and on: free vacation fund, retirement stability, and it is automatic.

I know $400 bucks sounds like a ton of money coming off your current pay cheque every few weeks. Even $200 sounds like a ton. Try and make an extra $100 bucks a week. Perhaps you can AirBNB your place, drive for a ride-share company, or even freelance. Doing what you love might actually help you retire comfortably.

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