How do you contribute to your RRSP?

Clare, a 28-year-old personal finance expert and blogger, likes to keep her last name secret, but she doesn’t hold back when it comes to talking about investing in her RRSP.

The Vancouver-based writer talks excitedly about opening her RRSP account at 22, long before most of her peers. But, she hesitates a bit when describing how she used to contribute back then.

“I was haphazardly putting in a lump sum,” she says. “I just put in whatever was left over.”

That changed about two years ago, when she started using index funds. Instead of depositing some money into her account at the end of the year, she began transferring a specific amount each month from her savings account into her RRSP.

While her $200 a month payments make up about 75% of her annual contributions, she can’t completely get away from the lump sum approach. At the end of the year she’ll add whatever cash she has left over into her RRSP.

Alison Griffiths, author of the recently released Count On Yourself: Take Charge of Your Money, says both options can work, but regular deposits are better. It forces people to save, she says. Simply set up an automatic withdrawal and leave it at that.

“The money goes out and you don’t have to worry about it,” says Griffiths.

Another reason to use the monthly withdrawal method, which is often referred to as dollar cost averaging, is because it can make investing less volatile. Since you’re investing the same amount each month, you’re not trying to time the market. If the market is down one day you end up buying more mutual fund or ETF units; if it’s up you buy less. In the end it should even itself out.

“Dollar cost averaging smoothes those bumps,” Griffiths explains.

But don’t count out the lump sum payments. Do-it-yourself investors who buy online usually have to pay commission fees on their transactions. If you’re spending $200 a month, and paying $29 each time you buy an ETF—the fee you’re typically charged if you don’t have over $50,000 of assets at the bank—you’ll end up giving your financial institution 14% of your intended RRSP payments each month.

In that case, Griffiths suggests setting money aside in a savings account and then depositing the cash into the RRSP once or twice a year.

But when’s the best time to contribute that lump sum? The earlier the better, says Griffiths. “If you’re getting a 3% dividend and can start that on January 1 instead of December 31, the extra year can really make a difference,” she explains. In other words, don’t wait until you have some leftover cash to make a contribution.

Clare isn’t investing through an online brokerage so she doesn’t have to worry about the transaction fees. And because she’s set up automatic withdrawal each month, she really doesn’t have much to worry about at all.

“I feel so much better,” she says about changing her RRSP contribution method. “I pay myself first now. And I like not seeing all that money sitting in my savings account—I don’t have the temptation to spend it.”