People often ask, “How can I start investing today?” and they are right to do so. Investments play a vital role in our financial future. But before you take the plunge like Warren Buffet, you really need to learn the basics of investing: what it is, when to start, how to reach your personal financial goals, and so on.
What are investments?
In theory, it’s easy for a beginner to start investing. When you earn money, you have three choices: spend it, save it or invest it. Let’s take a quick look at these options.
When you spend what is necessary to buy yourself goods and services and pay your living expenses, you are letting your money go. You won’t get it back.
When you save , whether in a bank account or by hiding your savings under your mattress, your money loses purchasing power over time as the cost of goods increases (this is called inflation).
When you make investments , that is, when you devote money to a specific project, your money can generate a financial return. In other words, by investing the money you don’t use today, you can make it work for tomorrow.
When should you make investments?
Before asking yourself how to invest, first ask yourself if you are ready to do so. You may have disposable income, but that doesn’t necessarily mean investing is the best use of your funds. First, consider doing the following:
Create an emergency fund. Avoid making investments if you will find yourself in a situation where you will have to withdraw the money for an emergency. As a general rule, it’s a good idea to have three to six months’ worth of expenses set aside, in an easily accessible account, to cover unforeseen expenses or events.
Take out appropriate life and health insurance. Check if you have such protection at work. From there, a Co-operators representative can help fill any gaps in your insurance coverage.
Pay off your debts. Have you taken out a mortgage, car loan, or student debt, or all of these? If the interest on your debt payments exceeds your potential investment income, it may be prudent to pay off your debts before spending money on investments.
Investing early and regularly also allows you to take advantage of what is called compounding. Here is an example of how it works:
Suppose that at age 20 you invest $2,400 per year for 10 years, with a return of 5% (after fees). At age 65, your investment will be worth $174,837.22.
Now suppose you start at age 35 and invest $2,400 per year for 10 years, with the same return of 5% (after fees). At age 65, you will only have earned $84,099.69, which is a difference of over $90,000!
This is the magic of compounding.
What are your goals?
Good investment planning should take your personal goals into account. Think about what you’re investing for: a major purchase, like a house or a dream vacation? A comfortable retirement? A bit of both?
Whatever your goals, there are smart investment choices that can help you achieve them, based on the investments that are right for you and your timelines.
They will be part of your investment strategy. Once you’ve established your investment strategy, it’s important to stick with it, even when the markets are down, to successfully achieve those goals.
What should you invest in?
Deciding where to put your money can be difficult. Let’s discuss a common source of confusion: the difference between an investment account and an investment vehicle.
Investment accounts
RRSP
Looking for compound growth in your retirement savings with a reduction in your annual tax bill? A Registered Retirement Savings Plan is a way many choose to save for their retirement. You can even use the funds to buy your first home or to further your education.
TFSA
Whether you’re saving for short-term needs — like a car, home improvements, or a vacation — or looking to supplement your retirement income in the future, a tax-free savings account can help. You’ll appreciate its flexibility and the tax-free growth of your savings.
RESP
Want to plan ahead so you can pay for a child’s university or college fees? A Registered Education Savings Plan , plus government grants, can cover some or all of these expenses.
RDSP
If you’re looking to provide long-term financial security for someone with a disability, a Registered Disability Savings Plan is a great way to do it. Like RESPs, this type of account is eligible for government grants.
RRIF
Continue to invest in retirement with a Registered Retirement Income Fund . This type of account is used to hold your RRSP funds when you reach retirement age; you can withdraw a fixed amount each month.
Investment instruments
Mutual fund
If you’re looking for diversification, professional management, and growth potential, mutual funds may be right for you . They pool the money of many savers to buy a wide variety of stocks, bonds and other assets.
Segregated funds
Like mutual funds, segregated funds are professionally managed, diversified investment vehicles that can help your money grow. In exchange for slightly higher costs, you benefit from additional advantages, in particular a guarantee on your capital contributions, even in the event of poor market performance.
Annuities
Annuities are low-risk investments that use your accumulated savings to provide you with guaranteed income for life or for a specified period. They are designed to provide you with a pre-determined amount each month based on your lifestyle and day-to-day expenses.
How to invest your money
It’s common to start by treating your savings plan as one of your monthly bills, and therefore set up automatic deposits taken from your checking account. This “pay yourself first” strategy helps you contribute regularly and budget for the expense.
In many cases, in fact, it is advantageous to start slowly, and thus accumulate the gains, big or small, over time. Investing regularly, even a modest amount, such as $50 per month, can be very effective.
By starting slowly, you can save money for your retirement, take advantage of funding and reduce the taxes you pay each year.
Then, once you are comfortable with your investment choices and have a better understanding of how to invest based on your risk tolerance, you can increase your contributions to increase your potential returns.
While it may seem alluring to act like a Wall Street banker, investing in stocks takes a lot of knowledge and effort.
Many individuals prefer professionally managed investments (such as mutual funds and segregated funds), where seasoned experts make day-to-day investment choices, in exchange for management fees.
When choosing a partner to manage your investments , look for a company that shares your values, offers a full range of options, and provides advice tailored to your situation and goals.
