Okay, so you’ve managed to balance your budget and now you have some money put aside….what now? Where should you put your money so it grows, instead of just sitting there, tempting you?
The answer, of course, is going to be different for everybody. They call it “personal” finance for a reason, after all. You have lots of options and it can get pretty overwhelming trying to decide where to invest your money. Don’t let it get too stressful, just take it one step at a time.
How much risk are you comfortable with?
Each different type of investment comes with its own level of risk. My husband would call this the “gambling” factor. The level of risk you can take on will have to do with:
- how much money you have saved up
- how many years there are until you need the money
- your earning potential between now and when you need the money
- how secure your job is
- the state of your health and its effect on your potential future earnings
- your ability to stay relaxed in the face of market downturns
- your level of investing knowledge
It almost goes without saying that the safer the investment, though, the less annual return you can expect on your money. So, you can go ahead and just put your money into a good, old-fashioned savings account, but those types of accounts only pay you between 0.5% interest and 2.5% interest annually. A higher risk usually comes with a bigger potential reward. So, of course, the closer you are to needing the money, the less risk you should be assuming. What some people like to do is mix it up, putting a percentage of their savings in safer vehicles, for protection. And the closer you get to needing the money, the larger the percentage you should put in safer investments.
Let’s take a look at some options for investing in the stock market.
Where should the money live?
In order to invest in the stock market, the first decision to make is what type of account to hold the money in. You can choose to open a trading account with a bank/financial institution, investment brokerage firm, or online/virtual investment broker. Usually the only difference between them will be the fee structures and your level of comfort/familiarity with the company holding your money.
Registered vs. Non-Registered accounts:
Non-registered accounts are just regular, run-of-the-mill accounts that can be owned just by you or jointly with someone else. There are no special advantages to this type of account and in most cases you will receive T-forms and be taxed on any income you make on investments within them.
Registered accounts have tax advantages to them and can only be owned by you alone, because they’re linked to your social insurance number. Because of the tax advantage, you’ll be limited in how much money you can deposit into them each year. TFSA’s have a dollar amount that’s the maximum allowable deposit each year and RRSP’s have a percentage amount that’s calculated from your income tax returns. TFSA limits are cumulative and you can check your personal limit on the Canada Revenue Agency website, while your personal RRSP limits are noted on your annual Notice of Assessment once you’ve filed your taxes.
Whether the account is registered or non-registered, once the money is in the account, you can usually do all the same types of investing (i.e: mutual funds, GIC’s, stocks, etc), so you should definitely put the maximum amount you can into registered investments each year. There’s really no need to pay unnecessary taxes on the money you make.
RRSP’s vs. TFSA’s:
I’ll save my detailed rant on this topic for another post, but suffice it to say that I think you should put your money into TFSA’s and ONLY put your money into RRSP’s if your employer has a contribution matching program.
Potential Returns on Your Money:
To note, returns are never guaranteed unless expressly stated, so these numbers are averages based on past performance, not a statement of how much you will actually make if you invest in them.
- GIC’s: GIC’s come in all configurations; locked-in or open, for all time periods from 6 months to 10 years. You can find GIC’s right now ranging between about 1.5% and 3.5% annual return. Generally speaking, the longer you lock your money into a GIC, the higher the return it will generate.
- Money markets: Money market accounts are usually used as a temporary holding place for your money in between investments and usually only return about 1%.
- Mutual Funds: These are groups of investments in the stock market that are managed by professional portfolio managers. The manager develops a portfolio of investments with a certain goal in mind (i.e: dividend income or to achieve a certain balance of assets). They pool your money with other investors’ money to buy within that portfolio. Usually if you buy mutual funds that are held by the same institution where your account is held, there is no commission charged to buy or sell these investments. Instead, each fund has a built in fee structure (MER) that is invisible to you, but basically shows you how much the manager is getting to manage the fund. If you buy another institution’s mutual funds, you’ll get charged the usual trading fees when you buy or sell them. These investments tend to be “safer” because a professional is choosing which stocks to hold within the portfolio, but keep in mind that nobody can predict the movements of the stock market. When I buy mutual funds, I assume a 6% return on that investment, on average, over the long term (long term meaning more than a year; usually several years).
- Stocks: When you buy stocks, you’re basically purchasing a small piece of the company you’re investing in. If they do well, you do well, and if they have a bad year, so do you. There are ways to mitigate your risk when choosing stocks and there are lots of schools of thought on how to effectively choose stocks. Again, I’ll save the details for a later post because this article has to end sometime, but I can elaborate quickly to tell you that you can choose between dividend paying stocks and non-dividend paying stocks. A dividend is basically a pay cheque that the company pays you on each share you own, either on a monthly, quarterly, or annual basis. You can also choose stocks that follow the basic trends of the stock market in general, called index funds. Index funds can also follow the general trends within certain sectors, like the real estate or energy industries. When you buy or sell shares, you’ll be charged a trading fee so of course, the fewer trades you place, the less of your profit goes into those fees. Again, when I buy shares, I assume a 6% return on my money, on average, in the long term, plus whatever percentage the dividends are, if applicable.
When you’re buying mutual funds, it’s rare to worry about the cost of them. The price of mutual funds is only updated at the end of each trading day, so you usually just place an order to buy them at whatever the most recent price was. You can also choose to automatically reinvest any dividends generated by your purchase.
When you’re buying shares, you can place a stop limit on the price you’re offering to buy them at. Because the prices of stocks fluctuate daily and often during each day, you’ll want to try to buy them at the best price possible. If you look at the share’s stats, you’ll see the highs and lows that it has traded at in the last day, week, month, year, etc. Set a price that you feel is reasonable based on those stats.Keep in mind that if it’s currently trading at a high point, you may want to watch it for a few days or even weeks to get a feel for its movements and to try and catch it for a good price.Similarly, when you’re selling them, you can set a limit price as well.
Trust No One:
In my opinion, you are the only person on this planet who cares if your money grows or not, so I definitely encourage you to learn enough about your chosen method of investment to confidently manage your own money.
Once You’ve Invested:
This is, by no means, an all-inclusive list of your investing options, but it’s a good starting point of the most common investments people make inside the stock market. Until you get your money invested, it’s not growing, so I suggest you get it at least into a savings account until you decide on which investments suit your needs.
And once you’ve got your money invested you don’t need to hover over your investments by checking them daily. Unless you have very little time before you’ll need the money, you can probably look at your investments monthly or quarterly and still manage them effectively.