All this talk of the fortunate few with million-dollar TFSA balances over the past week got me thinking about what’s holding people back from investing their money, especially when we know investing is key to growing wealth.
Here’s my take. There are four common barriers that prevent people from investing; limited cash flow, debt, limited knowledge and buying the wrong investments.
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Barrier 1: Limited cash flow
There are so many priorities for your money; mortgage/rent, car loans, RESPs, home maintenance, savings, child care. It’s understandable why so many people struggle to find two nickels to rub together at the end of the month.
The way to work around limited cash flow is by freeing up cash to pay yourself first, even if it’s just a dollar a day. In other words, before you pay a single bill on pay day, set aside a contribution to your investment plan.
The easiest way to do this is to sign up for your employer’s pension or retirement savings program. Each payday, typically before your taxes are taken off, a contribution to your savings program is deducted from your pay. You can set the contribution as a certain dollar amount, like $50, or as a percentage. I recommend setting a percentage contribution, so that each year, when you get a pay increase (fingers crossed!), your contribution increases. Maybe you start small, like at one per cent of your gross pay, then grow that every few months as the rest of your budget adjusts. Many employers match your contribution up to a certain amount — free money!
The second approach is also very easy; open your own retirement savings account, like an RRSP and/or TFSA, and contribute regularly through automatic banking deductions. Of course, you’ll have to come up with the money, but it’s your opportunity to trim back on a subscription here and there, switch to a low-cost grocer, take on a few extra shifts, etc. Start as small as you need to and build up.
Barrier 2: Debt
Debt payments consume a large portion of a person’s budget; sometimes 20 per cent or more. But waiting to invest until your debts are paid off is not recommended. The longer you wait to make investing a priority, the less time you give your money to grow through the power of compound interest and reinvested returns.
I recommend a balanced approach that ensures you still pay off the debt, but are building assets for the future. Something like an 80/20 split if you have credit card balances. If you had $1,000 previously going toward paying off debt, that would get split into $800 for debt and $200 for investments.
Typically the most effective way to reduce debt is to consolidate it into a lower-rate loan or line of credit. Rates are coming down after this past week’s announcement, which might work in your favour as you consolidate.
If you can’t consolidate (maybe you don’t earn enough on your T4), make your payments automatically on the day you get paid, pay a little extra each month (even $20 makes a difference), and negotiate your interest rates every three months so that you pay as little interest as possible.
Do everything in your power to avoid accumulating more debt while you’re paying off the existing amount. Investing for the future actually helps break overspending habits, if that’s been an issue. Once your consumer debts are paid off, you can put more toward your investments.
Barrier 3: Limited knowledge
Knowing how to invest your money is important. There are thousands of investment products available to Canadians and it’s difficult to know which ones are right for you. Enhancing your basic investment knowledge will reduce any fear you have around investing.
Ask around with friends about their favourite investment websites, podcasts, books, blogs and vlogs. I’d prioritize learning about exchange-traded funds, robo-advisers, strategies to invest consistently over time, what a good portfolio consists of depending on your age and life stage, etc. I also recommend playing around with a compound interest calculator — just Google one. Money coaches can be super helpful in building investment acumen.
You may eventually set up your own mock portfolio of stocks and bonds. Meeting with an investment adviser (get a referral from someone you trust) is also helpful. They should have some resources to share and will probably try to win your business, too.
Barrier 4: Buying the wrong investments
Since 1970, the annualized rate of return calculated by the S&P 500 index has been just over 10 per cent. That’s good!
Despite the market ups and downs, the entire index has gone up. This is why investment people always say how important it is to stay invested for the long term. Over time, there’s typically growth.
Today, low-cost products like ETFs allow investors to essentially follow the index, and mirror the market. Following the market versus trying to pick a winner of a stock tends to be a more reliable investment strategy for people. There are of course investment advisers who do select specific stocks, bonds and funds for investors, and they build diversification into the portfolio. In the event that one stock doesn’t do so well, the others in the portfolio can take up the slack.
Investors who lose money in the long term typically are not properly diversified and the investments they hold aren’t geared toward an appropriate level of risk.
A qualified investment adviser can help you get set up with the right portfolio for your needs. You don’t need to do this all on your own, so don’t let that be another barrier.
Btw, the vast majority of Canadians who have maxed out on what they could contribute to their TFSAs since TFSAs became available in 2009 have account values that sit around $100,000 — not in the millions.
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