Why pre-authorized contributions are a powerful investment tool
Written by Tangerine

Friday, September 16th, 2022

With a pre-authorized contribution program (called an Automatic Savings Plan at Tangerine), you can transfer a set amount of money to your investment or savings account automatically on a regular basis. At times when markets might be experiencing volatility, having regular automatic contributions to your investments can help you avoid emotional decisions and invest for your future.

No need to time the markets (Dollar-Cost Averaging)

An automatic approach to investing removes concerns about whether it's a good time to invest, because investing a fixed amount of money regularly means you automatically buy more shares when prices are lower and fewer when prices are higher. This is commonly called dollar-cost averaging.

For example: Say you plan to invest $1,200 into a fund this year. You can invest all your money at once, or invest $100 each month. The two approaches can have very different outcomes.

Option A: Invest $1,200 at once

Investment

Share Price

Number of Shares Purchased

$1,200

$13

92.3

 

Option B: Invest $100 each month

Month

Investment

Share Price

Number of Shares Purchased

January

$100

$13

7.7

February

$100

$10

10.0

March

$100

$9

11.1

April

$100

$9

11.1

May

$100

$10

10.0

June

$100

$7

14.3

July

$100

$12

8.3

August

$100

$13

7.7

September

$100

$11

9.1

October

$100

$9

11.1

November

$100

$9

11.1

December

$100

$10

10.0

Total Shares

$1,200

 

121.5

 

Investment

Ave. Share Price

Total Shares Purchased

$1200

$10.16

121.5

 

Comparison between Option A: Invest $1,200 at once and Option B: Invest $100 each month

Option

Total Invested

Ave. Share Price

Total Shares Purchased

Year End Value

A

$1200

$13

92.3

$923

B

$1200

$10.16

121.5

$1215

 

Even small investments could add up over time

The value of your investment has the potential to increase as time passes, and not just because you're adding to it regularly, but because what you've already invested is compounding.

Makes RSP Contributions at Tax Time Easier

Instead of waiting until the last minute to make a lump sum RSP contribution, setting up automatic contributions for your retirement tends to be the least painful way to come up with money to contribute to your RSP.

Getting your contribution in by the deadline means you can deduct what you contribute from your previous year's taxable income on your tax return. This is why some people scramble to come up with money to contribute to their RSP, often in a lump sum, often during a time of year when finances might be tight.

Saves time

In today's fast paced world, you're probably busy and on the go. You have enough things to worry about in your life, and banking shouldn't be one of them. After a few months of setting aside money automatically, you may not really feel the contributions anymore, but you'll likely end up saving more than you thought you could.

 

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