Posted by Canadian Dream on February 17, 2011
For those people just starting out with investing I’m going to make a suggestion that might go against the usual advice you hear. If you are clueless on investing when starting out and don’t know what to buy, then skip the stock market. Go straight to a GIC, savings account or something else very conservative.
Why? Well let’s face it when you are clueless and young you tend to have very little saved. So in that case a higher rate of return is nearly meaningless in the first few years. After all an extra 1% return on a $10,000 investment is just an extra $8 a month. You could save more by altering your spending habits than your investments. Also if you went straight to stocks without knowing anything, the odds of you losing some of your money is actually fairly damn high. The stock market is rather like a casino where idiots are separated from their money fairly quickly most of the time.
Of course you could potentially make more in the stock market in the long run, so that is why you need to educate yourself in the mean time and find out what investment method will work well for you. Then after a few years you can shift yourself over into the market with a vague idea of what you are doing.
So how do you know you are clueless on investing? Well that can be hard to tell since we tend to have a much higher opinion of ourselves than we should. I know I was even guilty of this in the beginning so might I present my list of you might be clueless about investing if:
- You pick a stock because you like the company name (Yes I did this with my first stock when I was a teenager)
- You don’t understand what the company does to earn money (for example, what is a junior mining company?)
- You have ever taken a stock tip from your paperboy, best friend or the clerk at the store
- You can’t read the company last financial statement to find out how much they made last year per share
- You have no idea what companies you own in your mutual funds
How about you? Are you clueless on investing? If so, when did you know that? If not, do you have any idea on when you stopped being clueless?
Posted by Canadian Dream on February 16, 2011
So are you sick of RRSP season yet? Well if so, might I propose a different point of view on it. Why is it no one talks about how exactly do you max out your contribution every year? We all know the limit is 18% of your previous years income, but that is a lot of money to have to save for most people. Heck until recently I didn’t even max out each year, so how do you do it?
Well to be honest it does get easier as you earn more. After all your basic expenses don’t change that much regardless of what income you make, we all have to eat, pay taxes and your power bill. So when you are earning more than $60K a year, saving for your RRSP is easier. Yet beyond earning more, what can a person do? Well here is my list of other ideas:
- Make it Easy. Make your contributions automatic so you don’t have to come up with any lump sums at the end of the year. You are more likely to get to your goal in little steps rather than trying for big leaps.
- Get the Free Money. If you have a defined contribution plan or group RRSP that gives you a matching amount on your contribution from your employer, make sure you are collecting every dime. Free money doesn’t happen often so fill out those forms now and get it.
- Pay Less Tax Today. Saving can be hard with your tax bill on each cheque, so if you sign up for an automatic RRSP contribution plan outside of your pension, make sure to fill out a T1213 form (deduction from source). This allows your employer to give your tax refund on every cheque rather than in one lump some at the end of the year. Depending on how tight your cash flow is that makes the savings a lot easier to do.
Ok, but how do these work to really get you to that 18% limit? Well it goes something like this. First get that free money from an employer match, so if you put in 5% and then put in 5% that brings you up to 10% in total. Then if use that T1213 form you can sign up contributing that last 8% yourself, but here is the kicker. If you are getting a 30% tax refund on that money, for example, you then only have to come up with the remaining 5.6% of your salary each month (or 0.70 * 8%). Why? Well because the remainder will come out of the money you use to be paying taxes with. So that way with only putting in 10.6% of your own salary you end up hitting your maximum RRSP contribution every year. Now isn’t that a lot easier than trying to save up 18% of your salary yourself?
So do you max out your RRSP each year? If so, any other tips for people? If not, why don’t you max out?
Posted by Dave on February 15, 2011
This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
In the past week I have made a bit of extra money – last Sunday I made several correct bets on the Super Bowl, and on Saturday night I won a poker tournament against 350 other people. In all, my total winnings are just a few hundred dollars (I am a decent gambler, I just don’t play for very high stakes) but it is a bit of a windfall in comparison to what is normally available for me to spend on a monthly basis, which amounts to around $100. Other than a possible bonus at work, I really don’t get any unplanned money coming in over the year, so this is kind of a pleasant surprise.
So, what am I going to do with this money? I figure I can use this money in two different ways:
- I could use it in a boring matter. By increasing a mortgage payment, which would put me that much closer to my end goal of having the house paid off as soon as possible. Although this small amount of money would make very little difference, if I did this with every spare cent I received, it would probably add up to a few thousand dollars over the next few years. A few thousand dollars would reduce the amount of time I’m paying my mortgage by maybe a month or two, which would put me that much closer to my goal.
- I could use it for “fun”. I have a list of stuff that I would like to buy at some point in the future and could apply this money towards one of these things. This could be something as small as a book or as large as a new television, but allows me to keep the “things” that I want in perspective.
So, what will I do? I’m going to spend it on something fun. Maybe a nice bottle of Scotch (something which I have recently acquired a taste for), a fancy dinner for my wife and I (an upgrade from our usual Swiss Chalet “date”), or some other experience (such as a round of golf at a higher-end golf course if the snow ever melts) that I normally wouldn’t spend money on.
Why would I disregard my boring financial plan? I am usually very conservative with my purchases, but the receipt of a small windfall will allow me to buy something different than I normally would be able to or to try something new, that wasn’t budgeted for. If this was a larger amount of money, such as a lottery win I would eliminate my whole mortgage, but this small amount of money will have minimal impact on my debt-load.
What would you do, or what have you done in the past with a sudden infusion of money?
