Regular investing is a great way to build wealth over time. But it isn't just about consistency – it's about growing your contributions to at least match the rate of inflation and thereby building wealth faster and more effectively.
Let's explore why boosting your investment amounts annually can be crucial for your financial future.
Why regular investing works
Regular investing through market ups and downs offers several key advantages:
- Dollar-Cost Averaging (DCA): By investing consistently, you naturally buy more shares or units when prices are low and fewer when they're high.
- Reduced emotional decision-making: A systematic approach helps avoid the pitfalls of trying to time the market.
- Compound growth: Regular contributions, when increased annually, amplify the power of compound returns.
- Built-in discipline: Automated investments ensure you stay committed to your financial goals.
Understanding the impact of inflation
Think of inflation as a silent wealth “eroder”. When prices climb by 3% annually, your purchasing power shrinks by the same amount. That $250 bi-weekly investment you started years ago? It's actually worth less today in real terms. By increasing your contributions annually by at least the rate of inflation, you're not just maintaining your investment power—you're building it.
The tale of two investors: a 25-year journey
To illustrate the importance of regularly increasing your regular investing plan amount, let’s consider two investors, Alex and Pat, who both start with $250 bi-weekly contributions:
Alex increases contributions by 3% annually to match inflation
Pat keeps the same $250 bi-weekly contribution for 25 years
Using a 6% annual compound rate of return assumption, and also assuming the funds are not subject to tax while invested (for example, as would be the case in a Registered Retirement Savings Plan (RRSP), here is the impact of those contribution decisions:
*Note: The projected returns are for illustration purposes only, and assume a 6% annual return with no tax impact through an RRSP. Actual returns may vary. The long-term rate of inflation is assumed to be 3%. Speak with your Investment Advisor about your specific situation.
The power of increasing your contributions becomes crystal clear—Alex accumulates over $127,000 more than Pat over the same period.
Time well invested – how to get started
Your wealth building journey deserves a boost to make it easier to reach your investment and life goals. Here's how to get started:
- Review your current investment plan
- Calculate your new contribution amount (minimum 3% increase)
- Contact your Investment Advisor to:
- Implement your regular investment plan
- Adjust existing contribution amounts
- Discuss personalized strategies for your goals
Remember, the best investment strategy is one that grows with you. Make this year the one in which you take control of your financial future by leveraging smart investing tactics to more easily achieve what is most important to you.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license.
