Education on the Basics of Investing and Investments

HOPE Session Recording - Types of Investments and Risk vs Return

Register for the next Hope Session: www.eventbrite.ca/e/395891079877

Executive Summary

1) Given inflation rates are in the high single digits, and interest rates are running at about 2% at best, your money is losing roughly 5% purchasing value each year. We need to earn more than 2% in interest, just to “keep up”

2) The type of account we invest in matters – tax consequences and considerations which could impact liquidity (the ability to withdraw/access the funds)

3) The type of investment, or investment vehicle matters – more risk, greater chance of reward, but naturally a greater chance of the investment falling as well

4) As a coach, I EDUCATE and teach you about what each investment is, and how the accounts “operate”. Advise you consult with your financial advisor when making a financial decision on investments to purchase, but can help you with the “design”, and also arm you with questions to ask your advisor.

5) This article is written in the context of the Canadian banking and investment industry, but most economies have similar offerings, so do your research to find what works in your country.

Why do I need to invest?

You may be highly risk averse and thinking, why invest? Why bother with such a complicated environment where I could lose my money? Why not stay with what I know and keep my cash in my account. The answer lies in PURCHASING POWER, the real value of money.  With latest interest rates delivering about 2% at best in a High-Interest savings account, and inflation consistently trending over 7%, if your money just “sits” in a bank account, its actually LOSING 5% of its purchasing power (or value) each year.  To try to prevent this from happening, you will need to take on a bit of extra risk (potential for loss), but it will help you keep up with the rising costs.

What different Investing Accounts Exist?

- Registered Accounts – Special Tax Treatment

• Tax Deferred (Deposits made reduce taxes, but withdrawals are taxed)

  RRSPs (Registered Retirement Savings Plans) – money put in this type of account reduces your current taxable income (and therefore taxes), but if removed before retirement will be taxed at 30%, and when taken out in retirement, will be taxed then

  RIFs (Registered Income Fund) – By age 71, you must convert funds that are in your RRSP to a RIF, and setup a withdrawal plan with your bank/account holder. Withdrawals are taxed at your marginal tax rate.

• Tax Free (Income is taxed upfront but growth in account is tax free)

  RESPs – Registered Education Savings Plan

  - Benficiary - the child or children who will ultimately receive the cash

  - Account Owner/holder – the person who actually owns the account and makes the deposit (one or both parents)

  - Sponsor – the bank where the account is registered

  TFSAs – Tax-Free Savings account – unlike RRSPs, income put into a TFSA does not provide any additional savings now but can grow tax free and be withdrawn at any time. Maximum contribution levels need to be adhered to, to ensure that penalties are not incurred

• Tax Deferred and Tax Free

  FHSAs (NEW!) – First Home Savings Account - this account is brand new, set to rollout in 2023, and is specifically designed to assist first time homebuyers in saving for their FIRST Home. Essentially, this account will be like a RRSP and a TFSA combined. $8,000 per year can be invested to a total of $40,000 lifetime (5 years), with amounts earned in the account growing tax free and able to be withdrawn at any point, as long as they are used for a first home purchase.

-        Non-Registered Accounts – No special tax considerations

Income that is put in is taxed fully, and gains made on the account are also taxed fully. Income earned can be in the form of interest (payments on debt/loaned funds), dividends (share in profits), or capital gains (increase in the value of the investment.

As a financial coach, I can help you when creating a savings plan, and helping to ensure you set yourself up for success in the long run, so you are able to access the cash when you need it. Ultimately, my goal is to help you a) generate savings, and b) ensure you steward those savings appropriately by putting them in the right investment vehicle and account, so that they don’t “disappear” over time. Overall, though, you will want to consult with a financial advisor and a tax accountant as well to cover all aspects of your decision, ensuring a holistic strategy is developed. I can aid in helping you to make those contacts and with questions to ask as well.

Types of Investments

-        There is a wide, wide array of investments, but four primary types exist:

• Stocks – a partial ownership share in a company – investment income comes through interest or capital gains (as the stock increases in value)

• Bonds - a right to a set amount (par value), with interest paid periodically

• Mutual Funds – a collection of investments – earnings come from all sources – dividends, interest and capital gains, with the composition based on how the fund manager structures the fund.

• Cash – Money market or high-interest savings

Each of the above investment types are useful, depending on the goals you have. You should always remember the saying: TANSTAAFL – “there ain’t no such thing as a free lunch”. So, keep in mind that if you have a shot at greater returns, in all likelihood there is greater potential for risk (which translates to downside or loss in financial terms). So be sure to work with a qualified financial advisor, and invest in a product, or mix of products, that is right for you. If you aren’t sure where to start, reach out to me and I can help steer you towards a qualified advisorand arm you with questions to ask.

Ultimately, as I outlined in the beginning, investing is multi-faceted with many items to consider. However, we need to ensure that we don’t get so “bogged down” or fearful that we don’t act. We have to act and take some risk to ensure that we keep up with inflation. In addition, investment advisors will typically tell you that if your plan is to invest for the long run you will severely reduce your exposure to the downside. “Time in the market is far more important than timing the market”.

To ensure you a) build cash to invest, and b) don’t have to withdraw funds too early because you need cash (that is, you are in it for the long-run), you should work with a financial coach. By gaining control of your budget and creating a solid financial plan to ensure you hit your goals, you will accelerate your success dramatically and achieve your dreams far faster than if you don’t set up an intentional plan.

If you are wondering where to start, reach out for a free financial freedom session. I’d love to chat with you and see how we can come up with a plan to achieve your dreams and live the life you want. You can also come out to a HOPE session and ask any questions you may have. Simply click on the banner at the top of the screen and sign up (zoom link provided with the registration from eventbrite).

EDUCATE. MOTIVATE. INNOVATE.

In Your Corner.