Friday, December 7, 2018
How Do I Start Investing?
What’s the hardest part about losing weight? Those first few weeks at the gym are where most people slip up. The pain is often too much to take. Luckily investing is a little more tolerable. You see, in the investment world, there is an odd desire to make things more complicated than they are. I watch the business news every day and sometimes even I can’t stand it. Today I want to show you how to start investing your hard-earned money, so it can grow. It is something we all know we must do so let’s make it as easy as possible.
Saving Money and Investing: Peas and Carrots
Sounds simple right? In order to invest your money, you must save some, to begin with. This is the first step for a reason. Most people don’t even save money at all, let alone invest it. This is why we must spend less than we make. This is why we should use a budget. This is why I write posts about how online shopping is a killer and Black Friday is for idiots. So, I write posts for a reason and not just to rip on things? Yes, my friends, yes I do. You must maintain a balanced budget and have a surplus every month. This surplus needs to be invested for growth. This is literally the ONLY way average people become wealthy. This is literally how even poor people can become wealthy. It’s true my friends, I have seen it. The site is called Budget Boss for a reason.
Start by knowing the vehicles
What is an investment vehicle? This is the “account” your money will sit in. Why is this important? Quite simply, tax. Each investment vehicle is taxed differently. Here in Canada, we have several different avenues you can choose. The most common is the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). The TFSA is exactly what it says it is, tax-free. Money inside the account grows tax-free and money withdrawn is not subject to taxes. The RRSP is a little different. It is funded with what is known as “pre-tax” dollars, meaning they have not been taxed YET. This allows you to get a nifty tax deduction for contributing to it. Money also grows within the RRSP tax-free, like the TFSA, BUT upon withdrawal, you will pay tax, as the money is considered “income” at that point. There are also other places to put your money like education savings plans (RESP), disability savings plans (RDSP), and straight up investment accounts (Non-Registered). I know this may sound complex, but it is fairly simple once you get into it. Start off with the TFSA (or Roth IRA, for my American friends), and go from there.
Choose the investment
The vehicle is the bucket, the investment is what you fill it with. You can invest in almost anything within your investment account. Stock, bonds, Guaranteed Investment Certificates (GIC’s), mutual funds, exchange-traded funds (ETF’s), index funds, commodities, and many, many more. This is what your money buys you and the growth of your account depends on what you are invested in. Most people stick to some form of stock-based investing such as mutual funds. Mutual Funds are a bundle of several stocks managed by a person, usually a team of people. They fill the fund with stocks of companies that they feel will perform well. Why these are so popular is because it allows you to not be invested in one company, spreading the risk amongst many. The key to which investment you choose is simple: What is your risk tolerance and what is your time horizon? Depending on how much risk you can handle, your investment choice will be fairly straightforward. Depending on when you need to use the money you invest, your choice will be determined as well. Again, this sounds more confusing than it is, but a good investment representative can help you with all the nitty gritty of investment types.
Automate, Automate, Automate….automate
Most of us get paid on a regular basis. Probably one of the simplest ways to invest is to automate your contributions right from your pay. You can line up the withdrawal into your investment account to hit right on payday, so you don’t even realize it is gone. Why is this so important? Two reasons. Firstly, for many, if you leave it up to your own doing, something will always come up that makes you either forget or just not contribute to your investment at all. Kids, bills, Christmas, the cottage, something always gets in the way. If you automate it, you won’t have this problem. Secondly, by contributing regularly you take advantage of what is called “Dollar-Cost Averaging.” Most people understand that the market goes up and down. By contributing on the regular you take advantage of down markets by buying more “units” or shares. Then when the market goes back up you then have more growth. Think of it as buying “on sale.” Either way, slow and steady growth will produce amazing results.
Set it and forget it
Why do most diets fail? Because people slip up and go back to their cheeseburger eating ways. Why do most people not become wealthy? Because they slip up and dip into their investment accounts. You MUST leave your investments alone if you want to become wealthy. We cannot control the stock market. We cannot control what stupid crap will come out of the president’s mouth. What we can control is the amount of money we invest and the amount of money we take from our investments. Time is the friend of the investor and the enemy of the procrastinator. By taking from your investments you “reset the clock” on their growth. It’s like a bar of soap, the more you touch it, the smaller it gets.
Does your company offer a “matching program?”
Some people are lucky enough to work for a company that offers a “matching program” for their employees. What this means is that they will add money to your investment account up to what you contribute. There is usually limits on what they will give you, but it is a great way to double your contributions. If your workplace does this, you MUST participate. My favorite kind of money in the world is free money. Taking advantage of a company match can propel your savings into overdrive.
Some key things to remember
You don’t need goals to invest. When I meet clients for the first time, I try to determine what they want to do with their savings. Is it retire early or comfortably? Is it buying a cottage or going on annual vacations? Is it provide a legacy for their family or loved ones? Many people I meet however don’t know what they want to do with their money. Just so you know, it is okay to not have any defined goals. Sometimes the thought of goals is overwhelming to people. What should I be doing? What is everyone else doing? Don’t worry about that! Want to know what my first money goal was? To not be a broke ass. I can safely say that goal was accomplished. As my money started to grow little by little, goals started to come to me. They will come to you to as long as you make it a goal to have goals. Having some money might be that first step that you need to take.
It’s all about the gains. You have automated your contributions. You have them going into the vehicle that best suits your needs. You have chosen an investment that best suits your investor personality. Don’t forget to think about personal growth. As your life goes on, your income will more than likely grow over the years. Use that opportunity not to up your lifestyle, but up your savings contributions. Lifestyle creep is a real thing and that is how you get people making multiple 6 figure incomes and not a penny to show for it. Every year that goes by should be an opportunity to save more than the year before. This is how you retire early. This is how you leave a legacy for loved ones. This is how you live the life you always wanted. A bigger house every 5 years may seem sexy, but to me, a million-dollar retirement account is as sexy as it gets!
Don’t get discouraged. The initial phases of your investment journey may seem fruitless. This is because gaining 10% on $1000 is only $100! This is where people stray from the plan. They save every month and by the end of the year, they only have a few thousand dollars. That can buy you a nice trip down south! That will also never grow if you use it for that. Rome wasn’t built overnight and neither will your investment account. It takes time, dedication and above all, patience. Time is an investor’s best friend. Impulse is his worst enemy.
“If you believe in yourself and have dedication and pride – and never quit, you’ll be a winner. The price of victory is high but so are the rewards.” – Bear Bryant
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