Investing can be a good thing. Maybe even a great thing. But notice that pesky little “can” hanging out there? Like a lot of potentially good things, your personal situation and approach matter a lot. You don’t want just to start blindly opening investment accounts left and right.
Think of it like a person who starts exercising. Sure, “exercise is good for you” is a blanket idea that feels right for everyone. But not everyone should come out the gate exercising the same way. You can even hurt yourself and be worse off than you were before. The same notion applies to investing. You want to start the right way for yourself, your future goals, and your financial situation.
Wise investing can be a crucial facet of your overall financial health. Over time it can help you build wealth and make you and your family more secure. But done rashly, it can lead you to lose more money than you’ve gained. Yikes. We definitely don’t want that to happen.
You might be thinking, “OK, great, I’m in, but how do I know which investment is right for me?” You’ve come to the right place. We’ve got a handy checklist to help you do exactly that.
Should you start investing (at all)?
First things first, you want to figure out if you’re in an advantageous financial situation to start investing. Is investing now going to help you, or does it have the potential to hurt you? There are some instances where the money you’re thinking about investing could be more beneficial to your financial health used somewhere else.
It’s not the most exciting thing, but you
1. You’re carrying high-interest consumer debt and don’t have kids
Credit cards, loans, and other consumer debt with an interest rate of 5% or higher are the enemies of your long-term investment potential. As long as you’re racking up debt in these accounts, you could easily be spending more to pay off interest than you make from your future investments. Priority #1 is to use any available funds to pay off these debts. Then you can start to think about using that money to invest.
Side note: Debts that build equity or directly improve your ability to earn in the future — like mortgages, car loans and students loans — are OK. These are considered “good debt.” While you still want to maintain a balanced budget, it generally makes more sense to consider investing while paying off any good debt.
2. You’re carrying high-interest consumer debt and do have kids
An exception to the rule in #1 is if you’ve got children.
Even if you’re carrying high-interest debt, small contributions go a long way with the childhood education grants and plans the government provides. You don’t want to miss out.
3. You don’t have an emergency fund
Emergencies happen. If we’ve learned anything in the last two years, it’s that the world (our own or the actual world) can turn upside down without much notice.
Yes, it’s more exciting to think you should invest this money instead. No, don’t do that. The primary purpose of an emergency fund is to be very available to you in something like a high-interest savings account. Keep your emergency fund separate from any additional money you’re thinking about investing. Once you’ve filled up your emergency fund and it’s sitting there protecting you (though, admittedly, not earning much interest), then you can think about investing anything extra.
This is where the fun starts.
How to pick the right investments to begin with
Not all investment accounts work the same. Knowing which you should start using largely depends on three key factors. Start by answering these questions.
What is the investment for?
When are you planning on accessing the money?
Would you potentially need the money in case of an emergency?
Investing is a long game. The magic of your investments is compound interest, but it takes time for this to work. The longer you have to let an investment sit and ride the waves of the markets and add up that sweet, sweet compound interest, then the higher your returns will most likely be in the end.
Based on your age and some of the most common life goals, you’ll have different time horizons with different goals. Thinking through these will help determine where to invest your money first.
Tax-Free Savings Account (TFSA)
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One of the main benefits of a TFSA is its simplicity and flexibility. You can take your money out of it at any time without penalty or other tax implications. Even better, you don’t lose that contribution room, meaning that you can put back whatever you took out in the future, again without penalties.
A TFSA is a solid starting point for anyone who’s brand new to investing and could be best for you if:
● You anticipate needing access to the money in 1-5 years
● You want flexibility and aren’t ready to commit to long-term investing
● You’re saving for a significant life event, like a child, wedding, dream vacation, etc.
● You don’t know when you’ll need the money or what you’re saving for, but you know you want to start investing
● You don’t have an emergency fund
Registered Retirement Savings Plan (RRSP)
It’s right there in the name. An RRSP is a cornerstone for many Canadians’ retirement plans. They’re designed to be great at growing your long-term tax-free savings. On the flip side, accessing any money in your RRSP early comes with major tax penalties. It’s a great way to save for retirement as long as you’re comfortable not needing access until you do retire. This is great for lots of folks but might not work for everyone.
The potential downside is that once you’ve contributed to your RRSP, you really don’t want to take out any funds until you retire. Early withdrawals from an RRSP will hit you with significant tax penalties, as high as 30%. Ouch.
Even worse, unlike a TFSA, when you withdraw early from an RRSP, you lose that contribution room forever. This is not the right account to take out some quick money for an emergency, and think you can add it back in later. Because you can’t.
An RRSP is a good bet for you if:
● You’re focused on retirement savings
● You’re comfortable not having access to any of the funds until you decide to retire
● You know you’re easily tempted to spend from a savings account or TFSA and want to be “forced” to leave your investments alone
Many employers offer a form of RRSP matching where they’ll double your direct RRSP contribution from each paycheque up to a certain percentage of your total income or maximum match amount each year. It’s a no-brainer. It’s basically free money, and if your employer offers RRSP matching, it’s well worth signing up for, even if you have to adjust your budget to accommodate for it. If you don’t, you’re leaving money on the table.
Long story short, if you’re just not OK with the idea of your investment being locked down and think you’ll need access to any of this money within five years, put it into a TFSA instead. If you’re ready to commit to your retirement fund and feel comfortable leaving this investment to grow (tax-free!) for the years or decades until you retire, then an RRSP is the way to go.
*An RRSP side note for first-time homebuyers: OK, I know we just said that under no circumstances should you ever take funds out of your RRSP early. But (there’s always a “but” isn’t there?) in a specific case you can: buying your first home.
The RRSP
The stipulation? You have to pay the money back within 15 years. If you don’t, you’ll be charged the same withholding tax as if you’d just taken the money out for any other reason.
Where to open your first investment account
So you’ve gone through the list, you’re financially ready to invest, and you’ve picked which account you’d like to start with. You’ve got options on where to open your account.
● Your bank or insurance company
This is pretty standard. Most major financial institutions offer a full suite of investments accounts and
● Go digital with a ”robo-advisor”
While it’s fun to think of a squad of money robots diligently working away on your investment portfolio, the term “robo-advisor” is a futuristic-sounding description for digital-first platforms that give clients automatic, algorithm-driven investments services.
To invest with a robo-advisor, you don’t need to go to a physical office or meet a person (though, of course, they have customer service and financial advisors if you do want to talk to someone). Accounts can be opened up online or even on your smartphone. Because of the efficiency and automation of robo-advising, their fees are extremely low and remove some of the traditional barriers people might experience investing. If you’re comfortable with technology, want the lowest possible fees, and don’t mind setting up your accounts without speaking directly to someone, a robo-advisor could be perfect for you.
On the flip side, if you want more of a personal touch or have a lot of questions you want to be answered one-to-one, investing with your bank, broker or independent planner might be best.
Jeremy Elder is a Toronto-based content marketer and copywriter with over a decade’s experience telling stories for some of the world’s biggest brands. He’s an expert at finding WiFi wherever you least expect it.