How to Start an RRSP With No Money

It took me longer to cotton onto the magic of Registered Retirement Savings Plan tax deductions than it should have. During my first real job, working as a reporter at a small community newspaper in Quebec, I overheard a senior colleague crowing about how much he'd gotten back in his income tax refund that year.

How could that be? I wondered. I was pretty sure he was making more money than I was, given his seniority and all. And I hadn't gotten a refund - I had *owed* money that year, even on my paltry $400 a week salary. Did I mention it was a *SMALL* community newspaper?

Ignorance Costs

Mind you, I hadn't been out of school for long and was pretty new to filling out income tax forms. It's almost certain I missed out on taking advantage of things such as deductions and credits because I didn't understand them and couldn't afford the $65 it would have cost to get my return done by a professional. Every cent I made went to filling the bottomless tank of the 1972 slant-six that drove me to municipal council meetings and wherever my editor sent me to find some news. Not much was left for rent and food, never mind paying someone to do my tax return.

It Takes Money to Save Money

When I found out that if you wanted more than a token refund you needed to invest in RRSPs, I was crestfallen. There was no way I could max out my contribution room: 18 percent of my poor little salary was still more than $3,700. Even half of that would be impossible.

Then I found out banks would lend money to you to open an RRSP account. You had to pay interest, of course. At the time, interest rates were edging up toward 20 percent. (This was a LONG time ago, right? I'm almost as old as dirt).

If I borrowed $1,000, I would end up paying at least $180 in interest. My heart sank. But if I was willing to fork over that $180, I'd get to keep the $1,000 instead of giving it to Ottawa and Quebec City.

Some Risks Pay Off

That made my decision. I took out the loan. After my student loan, it was the largest sum to date I'd borrowed and the risk of borrowing that much scared the hell out of me. But now I was determined to keep that $1,000.

So, that's how I opened my first RRSP account with no money of my own. I had to pay the whole thing back in a year and, during that year, I came to grasp the discipline of paying myself first. OK, I was actually paying the bank, but I'd get to keep $1,000 at the end, so I was still paying myself.

Principles of Saving

And I came to learn an important principle of saving: it's a lot easier to save money if you never get to see it in the first place. Automatic withdrawals to pay for an investment loan teach two disciplines:

• The power of dollar cost averaging - investing smaller sums regularly over time and allowing interest (or gains) to accumulate, and
• The power of compound interest, which allowed the accumulated interest to earn interest.

Thanks to the latter and the economic situation at the time, the interest my $1,000 earned managed to keep pace with the amount of interest I was paying. I pretty much broke even.

I proved to myself that there's always a way to squeeze enough out of my budget to pay myself a little bit each month. One of the few discretionary expenses I had was buying lunch every day at work. Since I could pack a sandwich for less than $1 and buying lunch would cost at least $5, I started packing lunches. At $5 a day five days a week, 20 lunches a month came to $100, conveniently the same as my RRSP loan payment.

Rinse and Repeat

I did the same thing the next year. But I wanted to get ahead of the game, so I pondered how to save more than $100 a month. I got a roommate to share the rent. Now I could pay back my RRSP loan that year and save an additional $1,000 to contribute toward the next year. Once ahead of the game, as my experience and salary rose, I increased the amount of the automatic payments I contributed each month.

Within five years, I had enough in my RRSP that I could borrow from it to make my first down payment on a house. And, in later years, I even took out loans for investments outside of my RRSP, the interest on which is deductible.

Mileage May Vary

It may not make sense for everyone to borrow to start a first RRSP account. It's probably rare to break even the way I did. But I'd do it again, even if I lost interest the first year. The discipline I learned in setting aside savings first every month - before lunch or any other discretionary spending had a chance to steal it away from me - would be worth paying a year's worth of very high interest, indeed.

Related Links:
What you need to know about RRSPs
How to Save Money on Lunch
Top 25 Money Wasters