No matter where you are in your life, you should always be saving money and have a clear financial road map. When we talk about saving money, we are not talking about a simple savings account at your bank where you earn next to no interest; we are talking about investing monthly into a diversified account that is earning a significant amount of interest.

What is a return? When we talk about investments, the main thing we are focusing on is COMPOUND INTEREST. This is the term for having your money work for you. It’s the amount of interest that is compounding year by year, month by month, and/or even day by day. The interest is essentially growing exponentially, meaning the more you invest and the higher the interest rate, the more extra money your money will earn for you. That extra money earned (which is essentially free money, also known as interest) is what we call the return on your investment.

Here is a conservative example:

You invest $400/month into an account that is earning 5% interest*

In 35 years this investment will grow to $456,330

The total amount you have actually invested is only $168,000

The total amount of interest earned is $300,000

Therefore, your money worked for you and earned you a $300,000 return!

Here is a practical example:

You invest $600/month into an account that is earning 6% interest*

In 35 years this investment will grow to $859,100

The total amount you have actually invested is only $252,000

The total amount of interest earned is $607,100

Therefore, your money worked for you and earned you a $607,100 return!

Here is an aggressive example:

You invest $1000/month into an account that is earning 8% interest*

In 35 years this investment will grow to $2,309,175

The total amount you have actually invested is only $432,000

The total amount of interest earned is $1,877,175

Therefore, your money worked for you and earned you a $1,877,175 return!!

Click here to determine how much your money can earn for you

A comprehensive financial plan should include all of the following

Short Term Plan
outlines your short term goals which may include buying a home, buying a new car, saving up for university, or perhaps even saving up for vacations

Long Term Plan
outlines your retirement goals in order to determine how much money will be required for life long income

Emergency Fund
an account with at least 3-6months worth of family income

There are 3 main investment vehicles in terms of the way they are treated for tax purposes

Tax-Free Savings Account (TFSA)

A TFSA is essentially what the name states – it’s a tax free savings account. This means that you will not have to pay any tax on the income earned from your investment and since the deposits are made with after-tax dollars (deposits are not tax-deductible) any withdrawals from a TFSA are tax-free as well.

In our opinion, every single person should have a TFSA set up. Whether you deposit $1000 or $5000 get your account opened today so you can take advantage of the yearly increase in contribution room. Unused contribution room is carried forward and accumulates in future years, in addition any withdrawals can be put back into the TFSA in future years as well.

You must be 18yrs old to open and account and you can contribute up to $5,000 per year.

Registered Retirement Savings Plan (RRSP)

An RRSP is a tax shelter for the time during which your money is invested in the registered plan. When you make a contribution to your RRSP, you get a tax deduction for the amount contributed. The deduction reduces your taxable income, so the higher your marginal tax rate, the greater your tax savings will be.

For the most part, income earned in an RRSP is not taxable while it remains in the account. This includes interest, dividends, and capital gains. Funds can be withdrawn from an RRSP at any time, but the total amount withdrawn will be taxed at your marginal tax rate at the time of withdrawal. 

An RRSP can be opened at any age and funds can remain in the account until age 71. At that time, the funds must be withdrawn or converted into a Registered Retirement Income Fund. 

Non-Registered Investment

A non-registered investment account means that there is no tax shelter in place for your investment.

This means that any income earned on your investment will be taxable. This includes interest, dividends, and capital gains which are all taxable at varying levels.

The big debate: TFSA or RRSP?

The answer really comes down to when you want to incur tax, now or later. The decision should be made on economics, so that ideally you pay tax when you are at your lowest tax rate.

Therefore:

If you expect your tax rate to be the same when you withdraw the funds as it is now, it makes no difference which tax shelter you choose as a TFSA and RRSP will produce the same end result.

If you expect your tax rate to be less when you withdraw the funds than it is now, then contributing to an RRSP would be your better option as you will pay less tax in the future when your funds are withdrawn.

If you expect your tax rate to be more when you withdraw the funds than it is now, then contributing to a TFSA would be your better option as you will  generate a much better return because the funds will not be subject to your higher tax rate when they are withdrawn.

In general, neither tax shelter is better per say - both TFSAs and RRSPs should be used in a complimentary combination to make up a solid financial plan.

Types of Investments

There are many different options that you can choose to invest your money in.

The most common options are:

Stocks (Equity)

Investing in the equity or stock of a company means that you indirectly own a part of that company. Owning a stock gives you the opportunity to participate in the growth of the company and earn income from the growth in the value of that stock (once you sell) or you can also earn income from dividends paid to shareholders.

Bonds
A bond is basically an IOU. Companies and governments issue bonds to fund their day-to-day operations or to finance specific projects. When you buy a bond, you are loaning your money to the issuer for a certain period of time known as the term. In return, you get interest on the loan, and you get the entire loan amount paid back on a specific date known as the maturity date.

GICs

A Guaranteed Investment Certificate is a secure investment that guarantees 100% of your original investment amount and earns interest at a pre-determined rate which can be either a fixed or variable.

Mutual Funds

A mutual fund is an investment that allows a group of investors to pool their money and hire a portfolio manager. The manager invests this money in stocks, bonds or other investment securities (or a combination of). The fund manager then continues to buy and sell stocks and securities according to the style dictated by the fund’s prospectus.

Segregated Funds

Seg funds are like mutual funds, in the fact that you are pooling your money with other people to share investment gains. However, because segregated funds are issued by life insurance companies, there is a guarantee attached that protects your principal from market risk. Seg funds are essentially mutual funds with a safety net.

A solid financial plan is diversified which means that your money is not all invested into one option. All of the above options have varying levels of risk and return so you want to choose the right mix for your personal situation in order to make up a comprehensive plan that suits your goals along with your tolerance for risk.

There are also many other types of investments, so it is best to speak with an Advisor in order to determine what is best for you, your family, and your entire situation.