Investing

Everyone has financial goals. Maybe it’s buying a new car, eliminating debt, securing your child’s education, going on vacation, retiring at a certain age or just comfortably managing your expenses. Whatever your financial goals are, informed saving and investing habits can help you reach them sooner.

Short-term goals

Saving usually allows you to meet your shorter-term needs. These short-term financial needs and goals can be anything from building a rainy day fund to something you might need in a year or two, like a down payment on a home or a new vehicle. Because these are short-term goals, you’ll want to be able to access the money when you need it.

Long-term goals

Investing is usually for our longer-term needs and goals. These long-term financial goals could be retirement, saving for a child’s education or any other substantial goal that’s future-oriented. Saving for these long-term goals usually spans 10 years or more. 

Contrary to popular belief, a savings account that earns interest isn’t investing. Interest rates on many savings accounts are too low to make any significant impact or keep up with an increased cost of living. 

If your money isn't going up in value at the same rate as the cost of living, the money you have today won’t go far in the future.

Let's look at an example:

With savings you often have very little risk, but usually less of a return on your money, as seen in the chart above. 

With investing, you’ll usually have to take on a bit more risk, but you have the opportunity for your money to grow with a higher return. 

Everyone has financial goals. Whether you’re setting up your children’s education, envisioning your dream home or imagining your life in retirement, cultivating good saving and investing habits can help you reach them sooner and more efficiently.

Don’t let uncertainty about investing hold you back. Investing isn’t a one-size-fits-all process and wherever you’re at, the start time to start is now.

Investing early and compound returns

When you’re in your twenties and retirement is 40-plus years away, putting $100 per paycheque into an RRSP can seem minimal. But starting early can have a huge impact on your long-term investments.

Yusef contributed to his RRSP for 20 years, while Priya contributed for 40. Who do you think will have more savings when they retire?

Assuming both RRSP accounts grew at 8 per cent per year with no fluctuations, Priya's total would be higher.

As you can see, the amount of time you hold the investment can maximize your compound returns.

However, not everyone has the luxury of starting early. If retirement is close, you can still maximize your investment savings.

Your Registered Retirement Savings Plan (RRSP) enjoys tax-free investment growth until age 71, giving you 30, 20, 15 years of tax-deferred growth for your RRSP.

However far retirement may be, whatever you have available, you can take charge of your savings by starting now.

Investing doesn’t have to be complicated. The best way to start investing is to use what you have.

Start investing with a financial plan

A financial plan is used to help quantify your life goals, like retiring comfortably or paying for your children’s post-secondary education. A good financial plan is comprehensive, covering all of the interrelated parts of your financial life — from assets and liabilities to investments, retirement planning, insurance, taxes, and estate planning — to make sure they’re all coordinated. 

A strong plan should be actionable, with concrete steps to take as you move toward your goals. It should also have the flexibility to adjust if your goals or circumstances in life change. The plan can be thought of as a roadmap for navigating your lifelong financial journey.

Not sure where to start? Get the expertise you need to take action on your goals with a financial advisor.

How much do you need to start investing?

You don’t need a lot of money to invest. Whether you have $20 or $2,000, you can get started now. Here are some questions to help you kickstart your investing plan:

1. What is your investing goal?
Whatever you’re saving for, there’s an investment that can help you get there. Identifying your intentions at the outset will make later decisions simpler, and will help a financial advisor recommend the best course of action for you and your needs.

2. What is your timeline?
When do you want to meet your goal? Investing for something you hope to achieve in two years will look quite different than investing for your retirement 20 or 30 years down the road.

3. How much can you afford to invest?
Once you’ve deducted your basic monthly expenses from your monthly income, how much do you have left over? You get to decide how much of these “leftovers” will go toward immediate wants, and how much you’ll invest for the future. Use our budgeting worksheet to simplify this process.

4. What is your risk tolerance?
How will you feel if the value of your investments takes a temporary dip? Will you be comfortable staying the course and giving them time to recover? You know yourself best. Whether your comfort level for risk is higher or lower, what matters is that your investments work for you.

In time, there’s a lot that you can learn about investing— however, there are only a few things you ne​ed to know to get started. Once you’re familiar with investment language, you can expand your knowledge.

Investment terms you need to know:

What is a Registered Retirement Savings Plan (RRSP)?

An RRSP is a “tax-deferred” investment account. That means you don’t pay income tax on the money you put into your RRSP in the year you make the contribution, but you do pay tax on your withdrawals. Your money grows in your RRSP tax-deferred, giving you enhanced earnings potential and tax savings if you’re in a lower income tax bracket in retirement than you are currently.

What is a Tax Free Savings Account (TFSA)?

A TFSA is an investment account that offers tax benefits with a lot of flexibility. You pay regular income tax on your TFSA contributions in the year that you make deposits, but those contributions then grow tax-free. You don’t pay tax on your withdrawals, even if you’ve earned significant investment returns on your contributions.

What is a cash account?

Unlike an RRSP or a TFSA, a non-registered account or “cash account” doesn’t offer any tax benefits. A cash account will help you earn interest, dividends or capital gains on your contributions, but you’re depositing taxed money and any income earned on your investment is subject to tax.

What investment account should you choose?

If the amount of tax you’ll need to pay is your only concern, follow these general guidelines:

• If your income tax rate is likely to be higher when you make withdrawals, use a TFSA.
• If your income tax rate is likely to be lower when you make withdrawals (i.e. when you retire), then choose an RRSP.
• If you’ve maximized your RRSP and TFSA contributions for the year, use a cash account. You could also use a cash account to save for a short-time goal, like a vacation or vehicle, and you need access to your money.

Flexibility and access to funds are also factors

Although you should definitely consider taxes when making your decision, other factors—like your saving and spending habits—are important.

Since you don’t have to pay tax when you withdraw from your TFSA, it’s easier to access those funds any time, for any reason. That makes TFSAs a great option if you’re unsure when you’ll need to use your savings. Just know that you can’t re-contribute back into your TFSA in the same calendar year, unless you have unused contribution room.

If you’re committed to saving for retirement and want to avoid the temptation of accessing those savings earlier, an RRSP is the wise choice. The tax consequences of withdrawing RRSP funds can be significant, so it’s always best to leave those savings untouched until you’ve retired. For this reason the inflexibility of an RRSP could be a good option for you, even if the numbers point to a TFSA.

There are many ways to save for retirement. Connect with your financial institution to see which accounts could help you reach your goals.

How we feel about investment risk is often tied to how we feel about volatility—even though risk and volatility mean different things. The amount that an investment’s price goes up and down is volatility, while risk is the permanent loss of capital.

The level of risk you choose will determine your potential return. Investments that offer a guaranteed return—like GICs—will be very predictable, but they may not grow enough in the long term to help you reach your goals. Other investments—like stocks—are more volatile and uncertain, however they offer a greater opportunity for growth. 

If you want to earn a higher rate of return, you may need to accept the risk and fluctuation that comes with that. Choosing the “right” level of risk is about understanding yourself and your preferences as an investor.

If you’re comfortable with the ups and downs that come with a higher risk option, a few years of negative growth can be erased in a short period of time when the market improves and can result in higher long-term gains.

If the thought of your investments decreasing—even a little—makes you uncomfortable, then you likely want to consider a lower risk investment option.