Three things you can do with money: 1) Spend 2) Save 3) Invest
Spending Pros – Satisfaction of good or service realized today. Cons – This money does not grow Be a wise spender: Do not spend beyond what you can afford Do not buy on impulse For large purchases do your research to determine a good price and quality For everyday items, check flyers and familiarize yourself with regular prices (buy items on sale)
Price vs. Quality Generally there is a compromise between the price of an item and the quality, but is not always the case. A bargain occurs when you can buy a high quality item at a low price. You have to determine/create what your identity is as a consumer Low price Low Quality High price High quality
Saving Money that is not spent and not invested, is accessible at any time and put into a safe place. General methods of saving: Chequing/Savings accounts Storing physical money RESP/RRSP Pros – can usually gain some interest (in banks) at low to zero risk of losing money Cons – It earns a low amount of interest
RESP Registered Education Savings Plan – A way to defer (pay later) income taxes and save for post secondary education. Registered Education Savings Plan CESG (Canadian Education Savings Grant) – Money paid by the government as a percentage (20%- 40%) of RESP contributions (% based on family income). Yearly max contribution currently $2,500. CESG (Canadian Education Savings Grant) If beneficiary does not go to post secondary school, the RESP may be transferred to RRSP.
RRSP Registered Retirement Savings Plan – A way to save for retirement while deferring income tax to when it is withdrawn. Contributions usually limited to about 10% per year. Pros – If at the highest tax bracket, you can avoid paying the highest tax percentage by paying a lower percent later (If you think you’ll make a lower amount later) Cons – Restrictions/penalties on withdrawing money. Restrictions on investments.
Investment Something that is purchased with money that is expected to produce income or profit: GIC Bonds Stocks Mutual Funds ETFs Real estate Loan Business
Bank Investments GIC (Guaranteed Investment Certificate) – Offers higher rate of interest than regular bank accounts for a specified period of time. If withdrawn early, there is a penalty and usually results in a rate lower than what the banks pay. Canada Savings Bonds – A bond issued by the Bank of Canada to fund its debt at a rate usually higher than the bank interest rates. Low Risk and low return and you cannot lose money
Bond A fixed interest financial asset issued by governments, companies, banks, etc. that pays the bearer a fixed amount on a specified date. Pros – Can have good returns. Lower risk than stocks. Cons – Can lose money if company goes bankrupt.
Stocks Stocks – Issue shares for a part ownership of a company. Can make money through Capital gains or dividends. Capital Gain – Buy a stock at a lower price and selling it at a higher price. The difference is the gain. Dividend – A portion of a company’s earnings distributed to shareholders. Pros – Usually higher returns. May have cash flow from dividends. Can choose stocks you want to invest in. Cons – Higher risk. Can lose money invested. Need to conduct research about companies you invest in.
Mutual Funds An investment that contains several stocks and is managed by a fund manager for a fee. Allows you to buy several stocks with much less than buying individual stocks. Pros – Diversification of stocks reduces risk (i.e. don’t put all your eggs in one basket). Expert picks stocks. Cons – The management fees can be high. On average, mutual funds have a lower return than the overall stock exchange. Usually buying for long-term, not capital gains.
ETFs Exchange Traded Funds – Similar to mutual funds except the ETFs is a collection of all stocks on that exchange (i.e. TSX, NASDAQ, etc.), instead of specific stocks. Pros – Reduced management fees and on average performs better than mutual funds. Allows purchase of all stocks on exchange with smaller amounts of money. Cons – Can still lose money. May invest in some stocks you don’t think will do well.
Real Estate Invest in properties for rental income and/or buying at a lower value and selling when housing market appreciates. Pro – Can have better returns than the stock market Cons – Requires a large amount of money. Less diversification. Management fees can be high. More tax paid when changing ownership. Susceptible to natural disasters. Could also be a good way to use a part of your house to pay for the mortgage. Need to find good tenants and will have to give up some privacy.
Investments and Risk Generally, high risk means high returns and low risk means low returns. Your tolerance for risk is dependent upon your identity as an investor (something that comes with experience) Low risk Low Returns Bank accounts GICs High risk High returns Stocks Bonds (company)