I’ve always believed that “there’s such a thing as free lunch in this world, you just need to be lucky and skillful enough to find the restaurant that offers it.” In my money saving post, I’ve listed the methods that I used to either save or get free money. For this post, I am going to describe in further details on some of the methods and show you how I saved money, get free money, compound the free money on top of my savings to get even more free money. I am going to show you how I started with $12,000 in savings, but end up getting $20,500 in my saving accounts and $160 extra to take my wife out on a date night (Shhhhhhh, she doesn’t know about the date night yet.)
Step #1: Contribute to my employee share ownership plan (ESOP)
One easy way to start saving for retirement is to contribute to your RRSP. If you setup an automated withdraw for every pay cheque from the start of your employment, you’ll hardly notice any material impact on your daily finance. As I mentioned in my money saving post that I was lucky enough to get a 50% matching for every dollar that I contributed to my ESOP. In this case, I contributed $5,000 and got $2,500 free money. Remember, the key thing is to direct both your contribution and the matching to your RRSP account. This way, you get to lower your income by the contribution amount (you don’t pay tax on the last $5,000 of your income – the highest tax bracket) and all your money get to grow tax free until you withdraw.
Step #2: Maximize my RRSP contribution
There are three ways that I used to conquer this task. First, using the automated withdraw method for every pay cheque. I killed two birds with one stone by having the ESOP contribution count toward my RRSP contribution amount and getting free cash along the way. The second way is to direct my year end bonus towards my RRSP account. By doing that, I am adding that amount to my RRSP contribution amount and my bonus money is not getting taxed when it’s paid to me and it gets to grow tax free until I withdraw. The third method is to top up the remaining amount to maximize the contribution before the March 1st contribution deadline. The first two methods did most of the heavy lifting, so I rarely need to do much for the third method. So maximizing my RRSP contribution is about an additional $7,000 on top of my ESOP.
Step #3: File your tax early to get your tax refund early
I usually file my tax around mid April or so. My highest tax bracket was 43% (darn, that’s a lot of taxes to be paying. On the bright side, I also get a lot in refunds too if I have deductions) for last year. So with the $12,000 being tax free at 43%, I get about $5,160 in tax refund just from my RRSP contribution alone. Sweet.
Step #4: Use my tax refunds to contribute to my kids’ RESP account
Since I am getting a free $5,160 in tax refund, I don’t have to find extra money somewhere to contribute to my kids’ RESP. All I need to do is contribute $2,500 per kid, the government will provide a free education savings grant of 20%. So I contributed a total of $5,000 for both of my kids to get $1,000 in free money. Extra icing on my saving cake.
Step #5: Compound the savings
So when I add everything up, I saved a total of $12,000 ($5,000 in ESOP and $7,000 in RRSP). I am getting a total of $8,660 in free money ($2,500 in ESOP matching, $5160 in tax refunds and $1,000 in RESP grants). At the end, my saving account is a whopping $20,500. That’s an awesome return of 72% right off the bat. See the breakdown summary in the tables below.
My two cents
I think that saving money is great, but getting free money on top of your savings is even better. I am not that great of an investor, but when I get a 72% return to start off with, that’s like getting to start at the 50 meter line when you are running the 100 meter race. This is an advantage that I can easily and legally gained and I might as well use it to my benefit.
So, what easy methods do you use to get free money and compound the return on your savings?