Remember last year when ING offered me an RSP loan of up to $10,000 and I wrote an entry musing about borrowing to invest?

Well, I never followed up, but I did actually end up borrowing $2,000 of that offer — and most of my posts thereafter about “contributing to my RSP” actually should have read “paying down the RSP loan”. It didn’t make much of a difference, since previous to taking the loan I had been putting $150/mo towards my RRSP and the payments on the loan were something like $165/mo.

Now ING is offering me the same $10,000 loan offer, but I’m not going to bother. Truthfully, I don’t know how much it really matters. Now that I have a pension with employer matching from work (something I didn’t have last year), my RRSP is taking a back seat until my student loans are paid off, my TFSA is maxed out, and I need to start dodging the tax man. So what was my reasoning for borrowing last year?

- I wanted to invest, not merely sock the cash away in a savings account.

- I felt like my current RRSP was too small to do anything.

- I just wanted to see what borrowing to invest was like.

So, I split the $2,000 equally between a GIC (1.5 years, 2.5% interest) and mutual funds (ING’s Streetwise Balanced Fund). Over 2011, the mutual fund has returned $30.70 in dividends (though the market’s a bit down right now so I only see a $15 profit — but I’m pretty sure it will go back up, these things can depend on the day) and the GIC is set to mature July with $37.78 in interest. Which means I’ve made $68.48 in profit for 2011 on the money I borrowed. The loan itself was at an interest rate of 3% over 12 months, and cost me about $27 in interest.

Therefore, I made about $40 last year by borrowing to invest in my RRSP.

Now, $40 isn’t very much, but it was immediately reinvested into the RRSP so if we let it compound for another 40 years maybe it will amount to much more ;) Also, I’m generally enough of a penny pincher to get excited about $40 — so how come I don’t want to borrow again this year? A few reasons:

- I don’t care about my RRSP anymore for reasons already mentioned.

- This year’s 1.5 year RSP GIC is only for 1.5%, not 2.5% like last year.

- I’m taking a JUST SAY NO approach to debt.

Nevertheless, I’m glad I borrowed last year. Even though it had zero benefit to me tax-wise (the main reason people borrow to max out their RRSP), I don’t think I actually would have been able to put $2000 away last year on my own. If you remember, I had a pretty severe breakdown spiritual awakening last spring, which included a month in Europe where, not only did I not work for 30 days straight, I spent $6,000. I immediately followed this financial irresponsibility with coming home to only work part-time. Frankly if I could have gotten out of payments on my RSP loan during that time, I probably would have — which means I would haven’t the full $2,000 + $40 there I do now. So ultimately I think I benefited from borrowing, but I’m counting on 2012 to be breakdown spiritual-awakening-free to justify not doing it again.

PS. my $500 in my RRSP savings account has earned $8 in interest. GO LITTLE RRSP, GO! =p

Earlier this week, I logged on to my ING account and noticed this at the bottom of the page:

I clicked to see what it’s about: I’m pre-approved for $10,000! Wouldn’t my RRSP love that?

Well, I didn’t take it, but I’m definitely NOT against borrowing to invest. Quite the contrary actually, I think an RRSP loan can be a really good idea if you do it right. Borrowing to max out your contributions, then paying off the loan within one year can reap huge rewards.

The current interest rate for an RSP loan is 3%. This means if I were to borrow the full $10,000 for one year, my monthly payment would be $844.82 and I would pay a total of $137 over the lifetime of the loan.

BUT if I managed to earn the same amount, 3% (a decidedly conservative estimate), for 40 years until I’m of retirement age at 65, that $10,000 would grow to $33,151.49. Yes, that initial $10K will return over 300%. So even if you subtract the $137 it cost you to borrow, you’re still sitting on a serious life win. Even the compounding lifetime aside, look at the first year by itself: if you took the $10,000 and put it in ING’s current 1.5yr GIC at 2.5% it would return you $252.88. Essentially you would get paid about $166 to borrow the money in the first year alone!

Additionally, there’s this great thing about borrowing to invest: it doesn’t decrease your net worth. While going on a shopping binge at the mall can really set back your number, borrowing money then dropping it right into a savings account nets zero change. Obviously harm can start if you don’t pay it off, but if you’re responsible, borrowing can only increase your net worth.

Nevertheless, I have a list of reasons why I didn’t activate the loan:

1) Stating the obvious here but I’m not interested in shelling out $844/mo. And need I even say it? Debt is bad! There is no such thing as good debt!

2) I don’t earn enough to benefit from the tax break for contributing to your RRSP, so I’m better off maxing out a TFSA first, then contributing to my retirement accounts after.

3) Now is not the time, but this is something I will definitely consider in the future. Procrastination is generally not my style, but when you’re 40 years from retirement, it’s ok delay one RRSP loan if you’re not feeling it.

I’m considering borrowing a fraction of what they’ve offered, but I feel like you just don’t see the same benefit when you significantly reduce the dollar amount. I have no debt except my student loans — something I just achieved a few months ago — and I’m in no rush to add any new debt, even if it looks promising on paper.

What are your thoughts on borrowing to invest? Are you too debt averse to do it or do you feel the benefits can outweigh the cost?