How to Invest your Money Wisely
Why saving and investing is important - if you plan on retiring comfortably one day, it will all come down to saving and investing. If you are not on track, do not worry, you are not the only one, 68% of Canadians say they will not have enough money for retirement.
So how do you Invest Wisely?
Start as soon as possible - If you do not start now, then when? The first step is starting as soon as possible. Why the rush? because of Compound interest. So what is Compound interest? It is the interest earned on the principal and the interest you have already earned - essentially "interest on interest" that will accelerate growth. (If you invest $ 100 every two weeks into the stock market for 10 years, assuming an 8% average annual return, you would end up with $39,000. And if you did that for 50 years, you would end up with $1.5 million.) The key is invest over a long period of time to build wealth, which is why it is critical to start as soon as possible.
Do not try to pick Stocks - Over the long run, less then 10% of fund manager beat the S&P 500. So if professional cannot beat the market, what chance do you think you have? Warren Buffet, one of the world's most famous investor suggested that in investing in the S&P 500 through a low-cost index fund is the best long-term investment strategy. You can buy these ETF through almost any broker or self-directed trading account.
Fees - Investing the correct way in the stock market can increase value to your money. Let's say you invested $10,000 a year for 40 years with an average 8% annual return with a 2% fee mutual fund, you would end up with approximately $1.5 million. But if you invested through an ETF with a 0.09% fee, you would end up with about $2.5 million. By choosing the lower cost investment fee, you made an extra million dollars, or 66% more money. Although a 2% free does not sound much, it can add up over 40 years.
Stay in the Course - Over time, stocks can go up and down, but the key to a great long term investment is to stay in the course. (Example the S&P 500 fell down 38% in 2009 during the financial crisis, however now the S&P 500 is over 400% by 2019. In fact, did you know the stock market has recovered from every downturn in history? It is normal for the market to dip, however just stay focused on the growing wealth over time
Start as soon as possible - If you do not start now, then when? The first step is starting as soon as possible. Why the rush? because of Compound interest. So what is Compound interest? It is the interest earned on the principal and the interest you have already earned - essentially "interest on interest" that will accelerate growth. (If you invest $ 100 every two weeks into the stock market for 10 years, assuming an 8% average annual return, you would end up with $39,000. And if you did that for 50 years, you would end up with $1.5 million.) The key is invest over a long period of time to build wealth, which is why it is critical to start as soon as possible.
Do not try to pick Stocks - Over the long run, less then 10% of fund manager beat the S&P 500. So if professional cannot beat the market, what chance do you think you have? Warren Buffet, one of the world's most famous investor suggested that in investing in the S&P 500 through a low-cost index fund is the best long-term investment strategy. You can buy these ETF through almost any broker or self-directed trading account.
Fees - Investing the correct way in the stock market can increase value to your money. Let's say you invested $10,000 a year for 40 years with an average 8% annual return with a 2% fee mutual fund, you would end up with approximately $1.5 million. But if you invested through an ETF with a 0.09% fee, you would end up with about $2.5 million. By choosing the lower cost investment fee, you made an extra million dollars, or 66% more money. Although a 2% free does not sound much, it can add up over 40 years.
Stay in the Course - Over time, stocks can go up and down, but the key to a great long term investment is to stay in the course. (Example the S&P 500 fell down 38% in 2009 during the financial crisis, however now the S&P 500 is over 400% by 2019. In fact, did you know the stock market has recovered from every downturn in history? It is normal for the market to dip, however just stay focused on the growing wealth over time
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Never Borrow to Invest - When you are investing into stocks for long term, it is important that you never borrow money, because if the market falls and you have borrowed money to invest, you may be force to sell, when you should actually be buying. (Tip: a margin account is a brokerage account in which the broker lends you cash to purchase stocks. If you borrow on margin and the stock falls, the broker may require you to add more money into your account or force you to sell some or all of your position)
Invest / Automate as much as possible - Like any investment, the more you contribute the higher appreciation of your investment.
Invest Tax Free - Another critical part of investing is to ensure that you are investing as tax efficiently as possible. That means investing in an RRSP or TFSA so the money you earn is not taxed. Our goal is to invest as much as possible in these accounts. ( Investments in an RRSP (Registered Retirement Savings Plan) are tax deductible and should be used just for retirement. A TFSA (tax-free savings account) isn’t deductible but is much more flexible and earnings are tax-free )
Save and Invest 20% of your Income - You should at least save and invest about 20% of your income. There a 50 / 30 / 20 rule that you should follow. It’s based on allocating 50% of your after-tax income for needs such as rent or mortgage, 30% for wants such as travel and entertainment, and 20% for paying down debt, saving and investing.
Click here to learn how to master your spending and learn about the 50 / 30 / 20 rule!