What you need to know before you start investing

Is it time to start investing? There comes a point in your life where you realize the income you earn from your career may not make you wealthy. To fix that problem, it’s a good idea to consider investing your money so you can further secure your financial future. By the time you retire, you can have enough wealth accumulated to have a comfortable future.

Are you ready to start investing?

The key difference between investing and earning income from work is the gratification process. When you work at a job, you get paid for the hours you put in. It has a quick turn-around. Jobs give you instant gratification and help you pay your monthly bills. 

Investing, on the other hand, is usually a long-term process and provides a delayed gratification. It may take months or years to benefit from investments. However, if you do it right, the rewards are huge.  

So, what should you know before you start investing?

Where should I invest?

The first question you’ll likely ask is where you should invest. Let’s take a look at the different options.

Stocks

When you buy a stock in a company, you are essentially buying an ownership share of the company. 

Successful companies sell shares to raise money for their business. These companies sell shares through a process called Initial Process Offering (IPO). When the stock is available on the market, it’s purchased by investors. 

If you are buying the stock, you are essentially buying it from these investors who sell, which makes a great way for an ordinary person to start investing in successful companies. 

A Return on Investment (ROI) is a metric that tells you how much you will gain or lose from an investment, compared to the amount of money you put in. The ROI from stocks presents itself in two ways:

1. The stock price appreciates. In this case, as it goes up, you can sell for a profit. 
2. The stock will pay dividends. Dividends are the payments made to shareholders from the company revenue. They are generally paid every quarter. 

Before you start investing in stocks, know they generally have a higher ROI, but they also possess risks. Your stock prices can fluctuate or fall for many reasons, like market volatility or crisis. 

Bonds 

Bonds involve loaning your money to a city, company or government for a set period of time. They promise to pay you back in full. Until they pay you back, you are given a regular interest payment.

You can start investing in a bond because it’s statistically safer than stocks and is less volatile in nature. Since they pay interest regularly, this type of investment is also predictable. 

You should know before you start investing in bonds, unfortunately, with safety, comes lower interest rates. And it’s not completely risk-free either. For instance, if the company goes bankrupt, you potentially lose your money. Apart from stocks, a lot of investors start investing in bonds to diversify their portfolios. 

Mutual funds

From 1990 to 2019, Canadians have invested from $100 billion to $1.71 trillion in mutual funds. That’s a lot of money! So, what exactly are mutual funds and why should you know about it? 

Mutual funds are nothing but a collection of stocks and bonds that a professional Fund Manager buys on behalf of you. A fund manager decides which stock or bond to buy and how much. Then, a mutual fund distributes the investment in units, which you can buy. 

Before you start investing in mutual funds, you should know you pay a management fee as part of your expense ratio. This is a small fee for getting a professional for your investment portfolio. 

There are 3 ways to make money off mutual funds:

1. Through dividends on stocks or interest on bonds. They distribute nearly all the net income they receive over the year. 
2. An increase in the price of securities is also called a capital gain. 
3. An increase in the fund share price. When it increases, you can sell your share for a profit.

Since it’s diversified, mutual funds have even lower risks. They are easy to buy and you can start investing with lesser amounts.  

Secure your future with RRSP & TFSA

It’s shrewd to start investing in a smart tax account to grow your money. Both Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) contribute to unique benefits. 

An RRSP, like its name suggests, helps you save for retirement while helping you with two tax benefits:

1. It reduces your income tax. You’ll either end with a lower tax bill or a higher refund, depending on your income. 
2. You don’t pay taxes on the money that you earn, unless you withdraw it. Until then, it grows tax-free. When you retire, you’re likely to pay less taxes because your income will be lower. 

A TFSA on the other hand not only holds your savings, but equities like stocks, mutual funds, GIC, bonds etc. This makes it a great container for investments as they don’t need to be declared as income and are tax-free. You are free to withdraw your money at any time with no penalty. 

Both RRSP and TFSA are great incentives for saving for your future. The earlier you start investing with it, the better!

Earn passive income with real estate 

Even though your house is considered an asset, you are not actually making money off of it.

But, buy a house and rent it out; you get access to a monthly cash flow. This is a long-term strategy. Investing in real estate needs discipline to accumulate capital. However, it has a longstanding ROI. Not just you, but your future generation can reap the benefits of it. 

Final thoughts

Before you start investing, create an emergency fund for yourself to access in time of need.

Inflation will always outpace the interest rate you get from your savings account in your bank.  So, the few dollars you save after your expenses should be used towards investing. Your money should work for you, not the other way around. That’s when you can accumulate wealth. 

Again, start investing soon! You will thank yourself ten years from now.

Be sure to tune back in throughout the month of November for more from all of us at Clinton Wilkins Mortgage Team. We are always willing to help answer your questions directly. You can get in touch with us here!