Most Canadians believe that investing money and building wealth is a complicated game that’s completely out of their reach. Sure, we can make investing complicated, but utilizing simple strategies will work just as well. If you are starting to invest now or have been at it for decades, you can grow your net worth over time using simple principles and habits. Here are some tips to get you started or help you in your investment journey now.
Begin Investing as soon as you start earning.
How much wealth you can accumulate depends on when you start investing. Starting early allows your money to compound and grow exponentially over time — even if you don’t have much to invest. Compare these investors, Joe and Donna, who set aside the same amount of money each month and get the same average annual return on their investments:
Begins investing at age 35 and stops at age 65
Invests $200 a month
Gets an average return of 8%
Ends up with just under $300,000
Begins investing at age 25 and stops at age 65
Invests $200 a month
Gets an average return of 8%
Ends up with just under $700,000
Because Donna got a 10-year head start, she has $400,000 more to spend in retirement than Joe! But the difference in the amount Donna contributed was only $24,000 ($200 x 12 months x 10 years). Start investing as early as possible. It’s a huge mistake to believe that you don’t earn enough to invest now and will catch up later. If you wait for a raise, bonus, or inheritance, you’re burning precious time. Not investing even small amounts today costs you in the long run. The earlier you start saving and investing, the more financial security and wealth you’ll have. Didn’t get a head start on investing and worried about running out of time? Just dive in and get started. Most retirement accounts allow for additional catch-up contributions to help you save more in the years leading up to retirement.
Use pre-programming to stay on-track.
It’s so easy to procrastinate saving and investing, the best strategy is to make it pre-programmed. It’s a simple, tried and tested, way to build wealth. It’s why employee plans take automatic payroll deductions. Pre-Programming works because it anticipates that you could easily go off the rails and be tempted to spend money that you shouldn’t. To be successful, you must be realistic about ways you could slip up and then create solutions that force you to maintain good habits.
Have money automatically transferred from your paycheque or bank account into a savings or investment account every single month. When you set up consistent, automatic deposits, you put money aside before you see it or get tempted to spend it. It’s a barrier you set up that allows you to outsmart yourself, helping you to manage your money wisely.
Putting your financial future on autopilot is truly the best way to simplify your life and slowly get rich.
Saving accomplishes short-term goals and prepares for unexpected situations.
Saving and investing are not the same thing. Savings is cash you keep on hand for short-term planned purchases and unexpected situations. For instance, if you’re saving money for a car that you plan to buy within the next year or two, keep it 100% safe in a high-yield bank account. You might save for annual holiday gift-giving or unexpected home expenses.
A common question is whether you should invest your savings since the interest paid on a bank account is so low. The answer is almost always no. Unless you have a huge amount of cash reserves, your savings should not be invested because the value could drop at the exact moment you need to spend it. The purpose of savings is not to put it at risk to make it grow, but to preserve it so you can tap it in an instant if you need it. If you don’t have a parachute fund that’s equal to at least 3 to 6 months’ worth of your living expenses, make accumulating one a top priority. Set aside 10% of your gross pay until you have a healthy cash reserve to land on if you lose your job or can’t work for an extended period of time.
Investing accomplishes long-term goals.
Investments are the opposite of savings because they’re meant to grow money that you spend in the future, namely in retirement. Investing is also best for smaller goals you want to achieve in at least 5 years, such as buying a home or taking a dream vacation. Start investing a minimum of 10% to 15% of your gross income for retirement. Yes, that’s in addition to the 10% for emergency savings that we previously mentioned. Consider these amounts monthly obligations to yourself, just like a bill with a due date.
If saving and investing a minimum of 20% of your gross income seems like more than you can afford, start tracking your spending carefully and budgeting it. When you see exactly how you’re spending money, you’ll find opportunities to save more. After you build up a healthy emergency fund, continue putting aside 20% of your income. You could invest the full amount or invest 15% and save 5% for something else, like a new car or a vacation.
Be leery of investments with high fees and high risks.
Different investments charge different fees, known as an expense ratio. For instance, an expense ratio of 2% per year means that each year 2% of the fund’s total assets will be used to pay for expenses, such as management, advertising, and administrative costs. Choose your investment options wisely and make sure that you aren’t getting gouged or taken advantage of by an advisor or bank. Investing in Private Mortgages is completely fee-free, meaning you pay no fees to invest and every dollar of your fixed annual return goes right in your own pocket where it belongs.
Go Forth and Build Wealth
The key to building wealth is to start saving and investing as much as you can as early as possible. But there’s no shame in starting small. Even putting away just $25 a month is better than nothing. And if you’re starting late, don’t stress about it—just get motivated to start right now. Setting up your accounts and automating contributions is a powerful step in the right direction. Years from now when you’ve got savings and investments to fall back on or to fund the lifestyle of your dreams, you’ll be so happy that you took control of your financial future.