DRiP Primer

Important Considerations before Starting a DRiP

As a DRiP investor, your ultimate goal is to build a secure future for yourself and your family. Committing to investing with DRiPs is a good step in that direction, but there are two other important personal finance considerations for you to think about before setting up a DRiP plan.

1. Employer-Matching Retirement Plans: If your employer’s retirement plan offers matching contributions, you should definitely consider contributing to this plan – at least up until the matching limit. For example, if you earn $50,000 and your employer matches your retirement plan contributions dollar-for-dollar up to 3% of your salary, you would be foregoing $1,500 per year by not contributing 3% of your salary to your company-sponsored plan. Think about it this way, if you were to invest $1,500 in your company’s retirement plan, you would automatically earn a 100% return on that investment based upon your company’s match. It’s very unlikely that you’ll earn those types of returns in any DRiP.
2. Consumer Debt: As of May 2011, the average American had almost $16,000 in credit card debt. The average interest rate on that debt was 13.2%. The annual interest incurred in this case would be $2,112. For every dollar you pay towards your credit card debt, you would essentially be earning a return of 13.2% because that dollar would no longer incur interest from the credit card company. On average, stocks have returned approximately 8.4% per year since 1871 and have actually returned almost 0.0% since 2000. Therefore, it’s most likely that your DRiP account will return less than the interest rate that you’re paying on any outstanding consumer debt. Taking care of that debt before contributing to a DRiP plan may be worth considering.




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