Investing is Easy
As we mentioned in Be Rich, you should aim to save at least 10 per cent of each cheque you earn during your working years. Now the question you probably have is: what do I do with it?
You could put it in the bank, buy a GIC (Guaranteed Investment Certificate), or put it into a so-called High Income Savings Account (HISA). While those are generally very safe options and you will protect your principal investment, you will lag behind inflation and the overall cost of living, and likely end up ‘behind the starting line’.
No doubt you want come out ahead of inflation and the cost of living (consumer price index (CPI)). And as an armchair investor, you want it to be easy as well as effective.
It’s not hard to do. It involves creating a low-cost, diversified global portfolio consisting of equities and fixed-income assets such as bonds. Some products (preferred shares and Real Estate Investment Trusts REITS) are a combination of the two.
Uh oh. You’re getting a headache already aren’t you?
Relax. Sit down in your favourite armchair, have a beer or a nice glass of wine. Here’s how you do it.
As a red-blooded hard-working Canadian, you will generally have 3 different investment accounts. A Registered Retirement Savings Account (RRSP), a Tax Free Savings Account (TFSA), and if you have money left over to invest once you’ve used up your RRSP and TFSA contribution room, a non-registered investment account.
What to do with your RRSP and TFSA is pretty simple, as both accounts are tax sheltered. But they work a little differently – the RRSP is a traditional tax-deferred account for which you initially get a deduction on your income tax return, whereas the TFSA is simply a wonderful non-taxable investment vehicle. The RRSP can hold pretty much any kind of investment (Canada, US, global), whereas the TFSA is geared more towards Canadian sourced investment income.
During your wealth accumulation (pre-retirement) years, contribute as much as you can up to your contribution limits, per your Canada Revenue Agency (CRA) notice of assessment), into your RRSP and your TFSA. If you’re in a lower tax bracket, concentrate on your TFSA first. Once you get into a higher tax bracket, you can use your RRSP to offset income and lower your taxes during your higher earnings years.
For your RRSP and TFSA, you should contribute regularly (preferably monthly or quarterly) to a low-cost product that provides you with proper global diversification and a nice (60-40) mix of equities and fixed income.
See? That wasn’t so hard, was it?