Save now and invest later

Keep the two concepts separate!

When you’re working full time there really is no time to do anything but work, go home, eat and sleep. At least that’s how it seems sometimes. I always tell people that no matter how busy you are, you have time, it’s simply about how you look at things. When you look at a glass with water filled halfway, do you see a glass that is half empty or half full?

Saving vs. Investing
Saving money is basically putting away money for future use, whatever that may be. Of course, there is saving money by spending less on items that you buy and this should directly reflect on what you put away. It takes effort to put money away since we all have so many expenses in our daily lives. We always have more “wants” than “needs” in life. We all have our dreams and always think about the items that we really want to buy but for obvious reasons we hold ourselves back because if you’re like me, you don’t want to doom yourself in financial failure.

Putting money away should be a must in your life. If you are getting a paycheque, you should automatically put away money into a savings account and never touch that account unless you are investing it.

Investing your money is looking for a return with a certain degree of risk. Government issued investments such as treasury bills and government bonds have virtually no risk but have minimal return. You can increase your risk by buying debt securities or even stocks, which have the potential for greater return. Overall you should have a good mixture of it all so that you can reap the benefits when a certain market is performing well.

Keeping the two ideas separate
A lot of people think about saving and investing as the same thing. In Canada we just had our Registered Retirement Savings Plan (RRSP) deadline pass on February 29th . The RRSP is to us what the IRA is to the citizens in the US. When I talked to people about contributing to their RRSP a response I often received was, “The markets are plummeting, why would I want to invest now?”

Responses like this make me cringe since it tells me that the person hasn’t put much thought into putting money away. Just because you put money away, whether if it is a savings account or an RRSP (just to park it), doesn’t mean you have to invest it in the stock market right away if at all.

Once you have enough funds put away then you can start thinking about investing it. Investing isn’t easy either but there’s no need to push yourself into putting everything into a penny stock that your uncle Jim has told you about. Put your money away and start learning about investment vehicles little by little. It’s a long process but the more financial knowledge you have the more success your will have.

Investing is an Art
Every person has a different portfolio because we all have different personalities. How we are as a person reflects in our portfolio because it reflects our risk profile. If you are someone that is more conservative then you will have more cash and fixed income securities than equities (stocks).

I’m someone that can take on more risk because I’ve been studying investing and trading for years and I’m more comfortable with taking risks. But in the beginning I thought savings accounts were the only way to go. That’s because I didn’t know what investments were available. I still don’t fully understand a lot of the investments out there since in the day and age we live in there are investments that are always being added.

Do what is comfortable
Some people might disagree with me on this but I feel that you should stick to what you are comfortable with. If you push yourself into something you don’t know it will only come back to haunt you. Even if you are to get a 100% return in the next year on a certain stock, if you have no idea how that return was produced you’ll end up giving it back in the near future.

Having said that, because you are uncomfortable with something now it shouldn’t stop you from pushing yourself to learning more about other investments. The more you learn and the more your experience the more comfortable you will be in taking on risks. It’s never too late to start and it’s a lifelong process.

Mo2 Thinks…
You should always be saving your money and putting it away into something that is extremely liquid such as a savings account or treasury bills so that you can invest it when the time comes. Start investing small and diversify your portfolio it doesn’t matter what others say; when you start out you have to diversify. Obviously with a $5,000 portfolio there is only so much you can do and that makes sense and this is the only time mutual funds make sense.

As your portfolio grows that means you have more experience and more capital. When you reach this stage you should diversifying without using mutual funds make sure you look to see that have different types of stocks looking at different sectors with negative correlation preferably.

In addition, make sure you have liquid cash-like assets along with fixed-income, and equity exposure. This is what we call asset allocation and finding the perfect fit for you will depend on your risk profile. As a general rule, the less risk tolerant you are you should stick to cash and fixed income assets and the opposite for those that are more risk tolerant.

Remember that saving and investing are two different things. Just because you aren’t ready to put money in the stock market just yet, should not refrain you from putting money away into your savings account or RRSP. The stock market isn’t the only market that exists, as a matter of fact despite the media exposure it receives; the currency market easily dwarfs the stock market.

Good luck with your saving and investing!

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Benefits of Putting Money in an RRSP

Can it really benefit you to have an RRSP?

I’ve decided that I’m going to change my writing style. I guess it’s just one of those phases you have with anything in life and it’s happening with my writing. I want to write more, but I’m lazy you see, and when I have to think about structure, grammar, outlines, etc. it makes me want to do something else. So I’ve decided to write freely and be a little disorganized and hope that my thoughts are somehow conveyed to you, the reader.

RRSP season as we call it here in Canada has arrived. Calling it the “RRSP Season” is extremely misleading since RRSP contributions can be done any time of the year. It’s just most people are lazy or confused and don’t know what an RRSP is.

What is an RRSP?
An RRSP stands for Registered Retirement Savings Plan, which essentially helps you plan for the future. For whatever you contribute into the RRSP you can make a tax deduction onto your income up to the contribution limit, which is 18% of your income to a total of $17,500 for your 2007 income. You can invest the money in your RRSP in all sorts of investment vehicles or just stick them all in term deposits it’s up to you. The great thing about this is that you can keep your money invested and have it compound tax-free until you take it out.

Retirement Savings? I think not!
The name RRSP is misleading in my opinion. There are so many ways of using the RRSP other than for retirement that it should be named something else. Besides you can ALWAYS take money out of the RRSP without a penalty (at the time of this article). There indeed is a withholding tax, but this is not a penalty. The withholding tax is something that you will have to pay anyway, it’s just taken at the time of withdrawal from your RRSP and if the percentage is above your tax bracket, you will receive a refund later on. And vice versa if it’s lower than your tax bracket.

You can also use the RRSP towards your first home purchase or to finance your education. Of course, there are exceptions as there always are but it’s worth taking a look at investing in RRSP.

Mo2 Thinks
I honestly used to think that RRSPs were a waste of time and money. But after taking some quality time looking into them I can assure you that I will be doing whatever I can to maximize my contribution to the RRSP. Having your money compound tax-free until you retire is unbelievably. Just go to any financial website (other than mine since I’m too lazy to create a calculator for you) and check out one of their compounding calculators and try out the one with after-tax returns and you’ll know what I’m talking about.

Honestly, investing is tough. As much as I have spent countless hours (yes that’s at least a 100 hours) reading about finance and investing there is no such thing as the Holy Grail. And guess what, there never will be. You simply have to diversify you portfolio and hope that something will win. By putting money in your RRSP you lower your risk a little because even if you come out with a lower return one-year, you won’t be taxed on it so you won’t have too much to complain about.

Obviously, investing in RRSP and what you invest in within your RRSP is a different story. Reread that sentence if necessary. You should make RRSP part of your investing for the future. Have money in your savings account, put money in your non-registered account, and buy that income property you were thinking about, it would all put you one step to your financial freedom and a happy retirement.

It all takes time and that’s ok, RRSPs will help you get one step closer to a goal that can sometimes be overwhelming. We all have time, let’s have it work for us for a change.

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Investment Portfolio Construction

Your Risk Tolerance
First question is, what kind of investor are you? Are you risk-tolerant? Can you emotionally sustain a 50% draw down of your account? If not, you probably want to stay on the safe side of investing focusing your investments on income.

Risk is a relative term. To some, risk involves losing money they originally invested. To others, risk can mean they venture out to invest in options or futures. And to others, reading this page might be a risk. Who knows, but we all have a different idea as to what risk is.

Income Stability
It is said that the stability of income has a lot to do with an individual’s risk tolerance. This isn’t about how much you make, it’s about how consistent your income is. So if you know what your money gross income is and you can set out a proper budget everything (possible link) then you know how much you can set aside and risk for your investments.

Mo2 Thinks
What I suggest you do is just think of what you could bare to happen to you. The worst-case scenario. Take a look at your monthly paycheque. How much of that can you seriously afford to lose? If you can’t lose anything, stick to safer investments like money market funds, treasury bills, and GICs. If you’re willing to lose a bit but want it to grow consistently then look at fixed-income investments, blue-chip equities with decent dividends, safer mutual funds, and preferred stocks. If you’re willing to take on a decent amount of risk then you can venture out to equities and even riskier investments like currencies, options and futures.

Asset Allocation is very important in how your portfolio does. It is said to determine upwards of 80% of your return. Take a look at the Asset Allocation article (link) that I wrote to get a better idea of what to do with your money.

Set Goals
What exactly do you want to achieve with your portfolio? Do you want a nice stream of income that would compliment your current salary? Do you want to risk more and try and hit a seven-digit portfolio? Or do you want your portfolio to pay off all your expenses on a consistent basis so that you won’t need to work anymore?

Whatever your goal is, it has to be realistic and you have to think of a timeline for it. Starting out with $10,000 and trying to turn that into $1 million in 10 years is pretty unrealistic, unless you add significant amounts on a regular basis to and take on a more aggressive portfolio. You should think about how much you will need for the goal that you are setting.

For example, if you’re thinking of retiring in say 15 years. They say that retirement requires roughly 70-75% of your pre-retirement income to maintain your standard of living. So if you’re making $40,000 annually, you’re looking at $28,000 to $30,000 in annual income from your portfolio. Now again, depending on your risk level your annual return will vary. But say you’re looking a conservative 6% return from your portfolio. To earn $28,000 to $30,000 you need $466,666.67 to $500,000 in your portfolio.

If you’re initial investment is $10,000 and you have 15 years to achieve this goal you’re looking at roughly $1512.72 - $1,626.76 in monthly contributions to realize the $466,666.67 to $500,000 in a portfolio. Of course you need to consider tax and inflation as you will be taxed yearly and your purchasing power will decrease over time.

Be realistic about your goals and strive to reach them before it’s too late to start, remember time is on your side if you have positive cash flow, compounding is the key to success over the long-term.

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