Investing 101

You have likely heard the term “investment” before but may not be sure how it fits into your financial plan. Well, to start, let’s talk about what an investment really is:

An investment as it relates to money is a contribution to a financial product that will provide a benefit in the future by way of a return. This means setting some of your money aside in a designated place for a set amount of time so that it can earn you additional income to help you achieve future goals.

Canadians generally invest their money to achieve one or more goals in life such as to retirement, a special trip or purchase of a home. Investing is different from saving in that Canadians often invest for long periods of time, even decades, for the prospect of a higher return on their money. The most common method Canadians use to invest is to place their money inside registered accounts like a Tax-Free Savings Account (TFSA), a Registered Education Savings Plan (RESP) or a Registered Retirement Savings Plan (RRSP). Each of these accounts are set up to help your money work for you and offer different tax benefits.

You can watch this video or scroll down and keep reading.

Getting Ready

When it comes to your finances, it’s important to have a strong foundation in order to be comfortable putting money aside. This means using a budget to manage your expenses, paying down any debt you may have, having an easily accessible emergency fund and taking advantage of your workplace pension or RRSP plan, if you have one. If you don’t have one or more of these things, consider speaking with a financial advisor to get started. They will help you take a holistic approach to your finances and work with you to develop a plan to do it all. Once you have a strong financial foundation, investing your money can be a great next step.

Getting Started

Everybody who has an income and financial goals should consider having an investment strategy. No matter how old you are or where you are in life, there is likely an investment solution that will suit your needs. For example, the three most common solutions I mentioned earlier, the TFSA, RRSP and RESP each serve a specific purpose and can help you achieve specific goals.

TFSA – Contributing to a TFSA is a great way to save for the short or long-term. It could be used for your emergency savings, vacation fund, and many Canadians use TFSAs as a part of their retirement planning as well. As the name suggests, you can withdraw your investment returns tax-free.

RESP – Designed for saving for a child in your life who has big dreams of getting a post-secondary education. An RESP allows you to earn interest, tax-free and receive grants from the government that match your contributions, up to 20% on the first $2,500 you deposit annually. For example, if you can contribute $2,500 a year in your child’s account, the Government contribution will be $500 a year.

RRSP – Contributing to an RRSP allows you to reduce your taxable income for the year you make the contributions and in the first 60 days of the next calendar year.  As the funds are withdrawn from an RRSP, they are included in your income and will be taxed. When you begin withdrawing money once you’ve retired and are likely earning a smaller income, you will be taxed in a lower tax bracket than if you had accessed the funds during your earning years. While an RRSP is primarily intended for long-term saving, funds can be withdrawn to be used as the down payment on your first home or paying for continued education without being considered as part of your income.

When you make a contribution to these kinds of accounts, you can either do so in cash and have them earn a basic interest rate, or you can choose another investing option, like a 5-year term deposit.

What's Next?

We know investing can seem overwhelming when you’re just getting started. I hope this article has helped give you a sense of what is possible. The investment vehicles we have discussed here are common ways to help put your money to work, but there are many options to explore from here. If you would like to consider your investing options, talk to a CUA Investment Advisor. No matter what your financial status is, having a plan is a great way to start. We’re here to help you get ahead – 902.492.6500.

Revised Jul 2, 2021

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