Most people have the idea of saving for retirement on their radar. Even if you don't always do it, you know they should be putting aside some of each paycheque to meet future goals. And these days, if you're working from home, you could even have a little more left over each month that you can add to your budget.
But when you're trying to figure out the best way to save and invest for retirement, you might have a lot of questions.
Here's an investing 101 guide to help bring your financial goals within reach.
The old rules about money need an upgrade
First things first—if you're stuck on how to get started, you're not alone.
Many of today's investors were brought up with ideas about money rules that don't really work anymore. For example, previous generations might have bought a house pretty early in life, maybe leaving saving for retirement until their 50s, when their kids were grown and gone. And if they had adefined-benefit pension plan, saving for retirement was taken care of for them automatically.
Life looks pretty different today, especially for younger investors. Canadians are spending more on postsecondary education. Especially in Canada's larger cities, home ownership isnot as accessible as it was in the past, and some people still have a mortgage into their retirement years. Finally, many people don't have a traditional workplace pension that will automatically set aside funds to provide a steady income during retirement.
These changes mean what worked in the past may not work for you today.
But there's some good news: Even though it might seem like the odds are stacked against you, you actually have more savings options today. Read on for the new financial tips that can unlock financial success for future you.
Tip 1: Learn the difference between product and container
Aninvestment containeris the type of account you put your money in, like a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP).
Aninvestment productis what you use to fill the container — like a GIC, mutual fund, or ETF, among other choices (don't worry, we'll explain all of these).
When you're ready to make a move, there are lots of different options for containers and products. But before you choose what's best for you, build your knowledge base by understanding how investment containers and products aren't the same.
Unboxing investment lingo: What to know
|Here are the main accounts – or "containers" – you can use to invest
|Tax-Free Savings Account, or TFSA
|Any interest or growth on your money within a TFSA is always tax-free, as long as you stay within yourcontribution limits.
|Registered Retirement Savings Plan,or RSP
|The money you contribute can potentially reduce your taxable income. Youpay taxwhen you take money out, but hopefully that's when you're retired and in a lower tax bracket.
|Here are the main products you can put in your containers
|Guaranteed Investment Certificates, or GICs
|A GIC provides a guaranteed interest rate over a set term. It's a low-risk savings or investment tool.
|Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. They are generally less risky than stocks.
|Unmanaged investments in single companies. With virtually unlimited choices, picking which stocks to invest in requires time, research and attention.
|Professionally managed investments, with many choices available. Provides access to potential market growth by including stocks from different companies, along with bonds, cash and "cash equivalents" (like T-Bills) in a single package. Built-in management fees can vary. Investments come with the risk of loss, and investors should read the prospectus before investing.
|Exchange-Traded Funds (ETFs)
|ETFS are a lower-cost way to access market performance for the long term. They can include many different company stocks and track various indices: some are broad stock markets, some are sector-specific, and some are bonds. Your direct oversight is usually required to manage your investments over time. Investments come with the risk of loss, and investors should read the prospectus before investing.
Tip 2: Your TFSA is a superhighway to meeting your future financial goals
Our second tip is to consider the Tax-Free Savings Account as a fast track to getting your money working for you.
TFSAs can be powerful toolsfor helping you reach your long-term financial goals. Here's why:
1. Even though "savings" is right in the account name, the truth is that you can use your TFSA to invest in any of the products above.
2. Because earnings aren't taxed, your money has more power to grow.
These two features together mean that for many people, the TFSA is a good choice for getting started with investing. Then, with time on your side, the TFSA's superpowers shine. That's because, with the ingredient of time, even small amounts can grow very significantly (if you don't believe us, check out thiscalculator).
Tip 3: Simple strategies have the best chance of success
Investing can sound complicated, but there are ways to keep things simple. One way is to combine ETFs and mutual funds into an all-in-one solution that gives you the benefits of both.
ETFs are a low-cost way to access global markets. If you invest only using ETFs, however, there could be a lot for you to manage: ensuring you make regular contributions, selecting the right ETFs that match your investing goals, reinvesting the growth produced by your funds, and adjusting the balance between your ETFs over time to make sure you're still following the approach you selected when you started and they continue to produce the intended results.
Mutual funds can help make investing much simpler and easier. This means you're more likely to stick to your investment strategy. With mutual funds, you can set up automatic contributions, any dividends you earn can be reinvested for you by default, and your investments may bebalanced backto your initial risk allocation if they drift off-course (some mandates may not do it automatically).
For many Canadians, the easiest way to start (and keep) investing is by using mutual funds. While some mutual funds hold individual stocks and bonds directly, others use a mix of specific ETFs. When you choose a mutual fund that holds ETFs, you get two main benefits:
You get an ETF portfolio that's diversified, even globally diversified, at a low cost.
Because the ETFs are held in a mutual fund, you don't need to research, buy, sell, and rebalance the individual ETFs yourself.
Three lessons for Canadians new to investing
Here are three top lessons for Canadians who want to get started with investing:
1. You don't need many different investment products.Instead, you can choose just one product and get your needs met. All-in-one solutions can take away the pain point of "How do I choose?"
2. Once you understand the benefits of ETFs, you may want them in your portfolio.People may think an ETF is just one stock instead of a whole basket. Getting this straight is essential.
3. Many of today's investors are fee-conscious and want value for money. ETFs usually cost less than the alternatives, meaning a strategy that includes ETFs is a perfect fit for someone who might be worried about spending too much in management fees.
Putting your plan into action
You already know you should save for the future. If you've been hesitating, our tips are designed to get you in motion. There's no better time to get started than now.
Use these tips – understanding the difference between investment products and containers, getting started with a TFSA, and considering using an investment strategy that gives you a simple and automatic way to benefit from convenience, global diversification and low cost – to support your long-term financial success.
Insights, advice, suggestions, feedback and comments from experts
As an expert and enthusiast, I have personal experiences or beliefs, but I can provide you with information on the concepts mentioned in this article. Here's a breakdown of the key concepts discussed:
Retirement Savings and Investing
The article discusses the importance of saving for retirement and investing to meet future financial goals. It acknowledges that the traditional rules about money may not work for everyone today, given changes in factors such as home ownership, postsecondary education costs, and the availability of workplace pensions.
Investment Containers and Products
The article explains the difference between investment containers and products. An investment container refers to the type of account where you put your money, such as a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). On the other hand, an investment product is what you use to fill the container, such as Guaranteed Investment Certificates (GICs), bonds, individual stocks, mutual funds, or Exchange-Traded Funds (ETFs).
Tax-Free Savings Account (TFSA)
A TFSA is an investment container that allows you to save and invest money while enjoying tax-free growth. Any interest or growth on your money within a TFSA is tax-free, as long as you stay within your contribution limits.
Registered Retirement Savings Plan (RRSP)
An RRSP is another investment container that offers tax advantages. The money you contribute to an RRSP can potentially reduce your taxable income. However, you will pay taxes when you withdraw money from the RRSP, ideally during retirement when you may be in a lower tax bracket.
The article mentions several investment products that can be used to fill your investment containers:
- Guaranteed Investment Certificates (GICs): GICs provide a guaranteed interest rate over a set term and are considered low-risk savings or investment tools.
- Bonds: Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. They are generally considered less risky than stocks.
- Individual Stocks: Individual stocks are unmanaged investments in single companies. Investing in individual stocks requires time, research, and attention.
- Mutual Funds: Mutual funds are professionally managed investments that offer a variety of choices. They typically include stocks from different companies, along with bonds, cash, and cash equivalents in a single package. Mutual funds can simplify investing and may offer automatic contributions, reinvestment of dividends, and rebalancing.
- Exchange-Traded Funds (ETFs): ETFs are a lower-cost way to access market performance for the long term. They can include many different company stocks and track various indices. ETFs require direct oversight for managing investments over time.
Tips for Investing
The article provides three tips for investing:
- Learn the difference between investment products and containers.
- Consider using a Tax-Free Savings Account (TFSA) as a fast track to getting your money working for you.
- Keep your investment strategy simple by combining ETFs and mutual funds into an all-in-one solution.
The article emphasizes that you don't need many different investment products and that all-in-one solutions can simplify the investment process. It also highlights the benefits of ETFs, such as low cost and global diversification, and suggests that fee-conscious investors may find ETFs appealing.
Remember, it's always important to do your own research and consult with a financial advisor before making any investment decisions.