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Financing Your Future: Here’s How to Start Investing

The first question to ask about investing – when to start – is easy to answer: now, or as soon as you can. More years of investing give your money more opportunity to grow. Beyond that, you have some choices to make. Here’s a guide.
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Investing means putting money to work for you. That much is simple. How to get started investing is more complicated.

In a nutshell, when you use money to buy something that will grow in value or provide you with other benefits while you own it, that’s investing.

The BMO RRSP annual study shows (2020 data) that Canadians do like to invest – 77% of the population is reported to hold investments. How Canadians invest is pretty evenly split between savings (53%) and cash (47%) with Millennials skewering towards cash investments.

The first question to ask about investing—when to start—is easy to answer: now, or as soon as you can. More years of investing gives your money more opportunity to grow. You want to take advantage of the time horizon.

The time horizon is a term used to describe the length of time it takes to hold an investment to reach a particular goal. For example, if you are saving for retirement you want as long of a time horizon as possible so you can make your money work harder for you. How? The earlier you invest, the earlier you benefit from compound interest.

Before you start investing, however, you must first make sure you can handle your living expenses like rent, food, and power bills; that any debts you have are manageable; and that you have at least a little money set aside in a savings account that you can access quickly for emergencies. You don’t want to go into debt to invest, and you don’t want to tap your investments to pay bills.

Once you have your monthly budget figured out, you’re ready to start investing. Then, you have some choices to make.

Decide how much to invest.

How much money can you live without each month? Don’t overreach; you want a figure you can stick with over time. Start small and increase your contribution each time you get a raise. If you have a shared plan at work and the boss matches your contributions up to a certain percentage, try to match that percentage.

Set an investment goal.

Decide what you’re investing for—like retirement, for example—and how much money you’ll need for your goal. It’s a good idea to work with a financial planner for this step as they can help you think of all the financial issues you may encounter now and in the future. Are your parents aging and you will be helping to pay for long-term care? Do you plan to have children and will want to set up a RESP? Do you plan to travel? Buy a home? Buy rental property? These decisions and more must be factored into your long-range goals. You plan should be flexible to accommodate your needs now, your future needs, and handle a few unexpected surprises (like an illness or pregnancy) along the way.

Decide how to invest.

Once you open an account, you’ll need to decide what to invest in: stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. Bonds generally are less risky than stocks, but you’ll earn less over time. Some stocks pay quarterly dividends to shareholders, providing income. Inexperienced investors will probably be better off putting money into a mutual fund mixing stocks and bonds rather than trying to pick stocks themselves. Compare mutual fund performances using widely available online rankings and performance data. Some mutual funds are index funds that simply follow market yardsticks. Consider ETFs, which bundle together various kinds of investments and are traded on exchanges like stocks. Some life insurance plans, like universal or whole life combine insurance protection with long-term investing.

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Decide how much risk you can handle.

Risk tolerance is a major part of investing. Decide how much risk you are willing to handle. There is nothing wrong with investing conservatively, as long as you understand how it will impact your goals. There is no point in investing in high risk strategies if this will keep you up at night!

A home is an investment, but ...

For most people, a home—besides being a place to live—is the biggest investment they’ll make. In most (not all) areas, home values rise over time. Mortgage interest and property tax can be tax-deductible. But even if your home rises in value, factor in the cost of repairs, upgrades, utilities, insurance, tax, and other expenses.

Avoid investment pitfalls.

Investing for most people is a long-haul game, so don’t count on a quick killing in the market. Keep an eye on fees and commissions that brokers and investment managers charge or that are attached to mutual funds (called “loads”). Beware of brokers who trade too often to boost their commissions or get incentives. Gambling is not a reliable investment. Avoid the latest fad investments; what goes way up usually comes way down. And don’t put all your investment eggs in one basket; diversify your holdings.

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