This article is by Robyn K. Thompson, CFP, CIM, FCSI is founder of Castlemark Wealth
Management Inc., a boutique financial advisory firm for high net worth
clients, with special focus on the financial needs of women. This the basics to making your money grow. She hits the spot when she said you are looking into investing but havent paid credit card debt, which eats you up for like almost 20% on interest. So, pay off those debts my dear readers!!
Thanks to Goldengirl Finance for this article.La mode, for Joie photocredit
I recently began volunteering with an organization called
Girls Inc.,
one of whose valuable programs that teaches teen girls the basics of
investing and money management. By the end of the program, the girls
will be competently managing a full-blown investment portfolio. Sadly,
that’s something that most adults are unable to do. Most novice
investors who come to me for advice have usually been burned badly by
trying to trade penny stocks in an online brokerage account – something
my teen protégés would never do. Here’s why...
Don’t start with a marathon
Even before you start researching stocks as potential investments, you
have to start with the basics. First, remember that there is no free
lunch. If you are serious about investing, then you will need to start
from ground zero and build from there.
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First rule: Apply money basics
It’s all about getting a grip on your income and your outgo. Live
within your means, and do not spend more than you earn. Simple advice,
and something you’ve probably heard a thousand times. Yet, many people
just seem unable to follow it. That’s where planning comes in. Most
people benefit from a
written plan
– somehow that makes your goals seem more real. You do not need to make
a six-figure salary to become a successful investor, but you do need to
set out a diligent savings goal and investment plan that will span
decades.
-
Second rule: Make it grow
Understand the power of compounding. This is the principle that any
earnings from an asset will in turn generate their own earnings.
Compounding allows your original investment amount to grow faster when
earnings are reinvested than when earnings are paid out. Most people
will have heard about compound interest, which is simply the principle
of compounding applied to interest-bearing assets, like Guaranteed
Investment Certificates, where the interest earns interest.
The more years you have to invest, the more manageable your plan
becomes. For example, let’s say you are 30 years old today and make
$50,000 a year. You have $10,000 in a non-registered investment account
that pays, say, 8% annually. Let’s also assume you can contribute $5,000
at the start of each and every year until you stop working at age 65.
At the end of 35 years, you would have accumulated $728,226…but you’ve
paid an eye-popping $271,774 to the Canada Revenue Agency along the way.
This is because the growth on your investments is taxed annually at
your marginal tax rate (in this case, using a 31.15% tax rate), leaving
you an after-tax rate of return of 6.4%. The CRA has collected $270,000
from you for absolutely no reason! That’s why Rule Number Four is so
important.
Make full use of tax-free, tax-deferred, and tax-efficient investment
plans and products. It’s what I call the 'The Wealth Effect'. While the
type of securities you hold (asset mix) and the choice of securities
(security selection) are important, research has shown that
tax-efficiency is absolutely critical for building wealth, because great
performance is useless if the taxman takes most of it away.
To see what I mean, take the same example I used in Rule Number Three
above, except apply it to a Tax-Free Savings Account (TFSA). This is a
federal government registered account that lets investments within the
account grow completely tax-free. In addition, there is no tax when you
withdraw funds from the account. Using the same investment plan
described above, when you reach age 65, you will have accumulated $1,067
412 in your TFSA. Yes, read that again - over one million dollars from a
$5,000-a-year investment! It’s all yours - and all without paying a
cent of tax on that growth…ever.
You get the same type of effect from contributing to a Registered
Retirement Savings Plan (RRSP). With an RRSP, your annual contribution
limits may be much larger than for a TFSA, based on your earned income.
Contributions are also tax deductible, a feature that could earn you a
tax refund every year. However, investments grow in the plan on a
tax-deferred
basis - in other words, you won’t have to pay tax on interest,
dividends, or capital gains on investments in an RRSP until you withdraw
funds from the plan - at which time withdrawals are treated as ordinary
income and taxed at your full marginal rate. Still, there are various
maturity options and strategies you can take advantage of to mitigate
the tax impact when it comes time to collapse your RRSP.
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Fifth rule: Pay off expensive debt
Always pay high interest debt off (like credit cards) first, before
investing. If your credit card charges you 19% in interest and your
expected market return on investments is 7% to 9%, it only makes sense
to pay the higher rate off first.
Your life will change and evolve, and your savings and investment plan must grow with you.
Control = growth
Once you understand the rules, the rest falls into place. Create an
investment plan that matches your risk-tolerance level. For example, it
makes absolutely no sense to say you’re a conservative investor and then
jump into trading penny mines on the TSX Venture Exchange. Once you’ve
set your investment plan in motion, track it weekly or monthly. You’ll
be surprised how fast your investable assets can grow when you take
control. If my teen investors can do it, so can you!
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