One of the truisms of personal finance is that time is an asset when it comes to investing: The earlier you start, the more time your money has to grow. This is true even if you don’t have a lot of money. For one thing, it’s good to get into the habit of putting something aside for the future. For another, even small amounts of savings will reap rewards over the long term.
Of course, when you’re starting small, you’re not going to be signing up for an expensive financial planner or a wealth adviser who only takes on clients with a high net worth. So how do you begin? This guide will walk you through the basics.
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Invest for long-term gains; save for short-term goals
One thing to keep in mind is that there is a difference between saving and investing. Saving simply means putting money aside, whereas investing means you’re using your money (or another asset) to try and earn financial returns. Remember also that investing is about risk and reward. Investing gains are rarely guaranteed, and that’s the tradeoff you make: recognizing you could lose money.
“As a rule, investing is for long-term goals, saving is for short-term goals,” says independent investment consultant Darryl Brown, who defines short-term as within the next five years. The volatility of stock markets means that they’re not the best place to put money you’ll need in the near future. The ideal investing time frame for stocks, says The Globe and Mail’s Rob Carrick, is 10 years or more.
Mr. Brown recommends that people ensure they have an emergency fund: at least six months’ worth of living expenses put aside in a safe and easy-to-access location, such as a high-interest savings account. Once your emergency fund is set up, you can start directing funds into an investment account to start building a long-term investment portfolio.
Look for ‘free money’: Does your employer have a top-up program?
If you have investment top-ups available to you, they’re a good place to focus your initial investment efforts.
For example, many employers offer matching contributions to workplace retirement savings plans. This means that if you sign up for the company pension plan, group registered retirement savings plan or other similar initiative, your employer will put money in alongside your own contributions. Mr. Carrick calls it “free money” and gives one example of a company that pitches in 50 cents for every dollar an employee invests and, remarkably, still struggles to get people to sign up.
Registered education savings plans (RESP) are another example. They are a government savings tool to help families save for their children’s education. Opening and contributing to an RESP gives you access to government grants and top-ups, and the earlier you open these accounts, the longer your money has to grow. Low-income families are eligible for grants even if they aren’t able to contribute their own cash – but they do have to create an account. If you have children, make sure you’re maximizing your benefits from this program.
Make a budget and set up automatic withdrawals
Even if your income is low, it’s a good idea to get into the habit of creating a budget that includes money for investing. The trick is to pay yourself first, what investor Jack Harding defines as treating saving and investing just like your rent or mortgage – an absolute necessity. “I view savings as a non-negotiable and set up automatic withdrawals to avoid temptation,” he says.
Mr. Carrick also views automatic contributions as the key to a successful investing plan. If you save only when you have the money handy, you run the risk of never saving or not saving enough, he says.
Mr. Carrick recommends setting up an automatic transfer from your bank account to your savings or investment account that happens immediately after your paycheque is deposited. He suggests starting with a small amount that’s comfortable – perhaps 10 per cent of your net pay – and increasing the contributions as you can, such as when you get a raise or a higher-paying job. “One of the great benefits of automatic saving is that you never have to think about saving,” he notes. “Saving becomes so routine you may stop noticing that you’re doing it at all.”
If you’re into apps and fun math tricks, you can also sign up for tools like Wealthsimple’s Roundup, which links to your bank account, tracks the purchases you make with your debit or credit card, rounds them up to the nearest dollar and moves the difference into your investments.
As for actual dollar amounts, it depends on your situation and where you want to invest.. You can find no-fee high-interest savings accounts to get your nest egg started.
How to make an investment plan
If the first step in investing is finding the money, the second is figuring out what to do with it.
It’s important to be clear about your intentions for investing, Mr. Brown says: What are you trying to achieve, and why? This comes alongside understanding the risks that come with investing and how comfortable you are with them.
Mr. Brown suggests creating an investment policy statement, or IPS. You can do this on your own or with the help of a professional. The IPS is your investing road map. It will include things like your objectives, your risk tolerance, your liquidity requirements and any other personal factors. The idea is to create a plan that will help you reach your goals without getting sidetracked.
THE BOTTOM LINE
Get started investing
- Work with a financial advisor to determine your ISP, short-term, and long-term goals
- Set up automated contributions from your bank account into your investing account.
- Use the funds you deposit to purchase a diversified portfolio that meets your risk tolerance and other needs.
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