.png)
How to start to invest
Contributed article by : Beverly Wilks – Financial Education Advocate and Blogger at Bacon & Heels
It’s never too late, or too early, to start investing - this is one of the best ways to ensure long term financial security.
I know that some find stocks and the stock market to be intimidating, so in this month’s financial discussion we are going to tackle how you can start to invest.
How to get started
What are the best investment strategies for beginners? This is a great question; investing is an individual sport –what works for one person may not work for another. So below you will find some tips on how to start.
1. Determine your timeline
As the saying goes, the best time to plant a tree was yesterday. The same holds true for investing, the best time to start to invest is now; so start early as possible as this will allow your investment to compound and grow. If you are starting a bit later in life, that is ok too, the most important thing is to start.
There are two types of investing:
Short term investing
These are investments that can easily be converted into cash. And short term investing is usually reserved for funds that will be needed in the next 1- 5 years and often this are funds for house/car downpayment, education, travel, etc.
Common examples of short team investment vehicles include High Interest Savings Account, Certificate of Deposit (CDs), Guaranteed Investment Certificate (GICs).
Long Term investing
Long-term investing is the practice of buying and holding investments for 10+ years rather than buying something with the purpose of selling to make a quick buck.
This type of investing is usually for retirement. To find the right long-term investments for you and your portfolio, connect with a financial advisor to speak about your financial goals, and to determine how much volatility you are willing to endure. The advisor can help you choose investment vehicles that aligns with your risk tolerance and work with your time horizon.
2. Deciding how much to invest
We all have financial responsibilities, ie: Rent/Mortgage, paying down debt, savings, paying utilities, school loans, etc. Investing is usually the last thing that we think about.
How much you choose to invest each month will depend on your own personal circumstances and your investment goals. It is important to only invest the amount of money you can spare each month – which is why it could be a good idea to use a spending plan as this can help you to determine how much of your monthly income you can actually put towards saving and investing.
When it comes to investing for retirement, a general rule of thumb is to invest 10-20% of your monthly income.
This does not mean that you need to start at this amount per month. Start where you can, ie: 5% a month and then work your way up to 20%, and then stick with it – consistency is essential.
If you are fortunate to have a retirement account at your company, and they offer a RRSP match, be sure to contribute enough to that account to earn the full match, this is free money that will definitely benefit you in the long run.
3. Open an investment account
Visit your bank and speak with a financial planner / advisor to open an investment account(s).
There are a couple of investment accounts that you can open, a registered Retirement account (RRSP), or a non registered account. Here is the difference:
If you are investing for retirement, you can open an RRSP account. An RRSP is a way to defer taxes, get a great tax deduction and this is a good way to save for retirement. Many investment vehicles can be held in this account such as GICs, bonds, stocks, mutual funds and ETFs.
Here’s what you need to know about RRSPs:
There is a limit of how much you can place in your RRSP every year. Usually the CRA determines this and your personal amount can be found in your most recent tax assessment.
A typical contribution is equal to the lesser of 18% of your annual income, or a maximum of $27,300 (2021 RRSP Limit). When planning for retirement, consider your time horizon and the amount you need to retire, a retirement calculator can help you determine the amount that you can invest and save each month.
If you are investing outside of a retirement account, you can choose a taxable brokerage account, this can also be done through your bank. While these accounts don’t offer the tax advantages of RRSPs, they also don’t have any limitations on how much money you can deposit or when you can withdraw funds.
You can also open a TFSA - a registered account designed by the Canada Revenue Agency (CRA) to help Canadians build long-term savings.
A Tax-Free Savings Account (TFSA) can be used to save for any goal. Since you put after-tax dollars into a TFSA, these investments grow tax-free and you won’t pay any tax when you withdraw the money. You can hold a wide variety of investments within a TFSA, such as: cash, GICs, bonds, stocks, mutual funds and ETFs.
The caveat is that you are only permitted to put in $6,000 (2022 limit) a year and this account and it is not to be used for day-trading.
A common misconception about opening an investment account is that you need to have thousands of dollars, this is simply not true. Most banks allow people to open account with $100 – the most important thing to do is to start.
Once you have opened your account, you can work with an advisor who can guide you on your investment journey. After they learn about your financial goals, they can also provide insight into taxable accounts and tax-advantaged accounts.
4. Investment options
So now you are ready to take the steps to start investing! It’s important to understand the most popular investments vehicles:
Stocks - A stock is a share of ownership in a single company. Stocks are also known as equities.
Bonds - A bond is essentially a loan to a company or government entity, which agrees to pay you back in a certain number of years. In the meantime, you get interest.
Mutual Funds - A mutual fund is a mix of investments packaged together. Mutual funds allow investors to skip the work of picking individual stocks and bonds, and instead purchase a diverse collection in one transaction. The inherent diversification of mutual funds makes them generally less risky than individual stocks.
ETFs - Like a mutual fund, an ETF holds many individual investments bundled together. The difference is that ETFs trade throughout the day like a stock, and are purchased for a share price.
5. Follow your investments
Once you have opened your account and started to build a portfolio, you’ll want to establish a schedule to check in and see how your portfolio is performing.
It is good practice to rebalance your account annually to ensure that the portfolio mix is inline with your financial goals, and is aligned with your risk tolerance. Regular check-ins can help you keep your portfolio in order.
TIP: Do not to look at your investment account every day – the market fluctuates and looking daily can provide you unnecessary stress. Remember long term investing is for the long term!
Summary
Putting your savings to work, though investing, is typically the first step to growing wealth. Investing does comes with levels of risk and return, so educating yourself, reading blogs, and speaking with a financial advisor to align on your goals, time horizon, and risk tolerance, and starting to invest will allow you to build your financial future.
To learn more about Beverly and Bacon & Heels, read the "Power 5" interview that we did with her in September 2021 - you can read the full blog post HERE.
Thank you for your contribution Beverly!
Contributed article by Beverly Wilks, tech marketing executive, financial literacy champion and blogger at Bacon & Heels.