How I Got Started Investing - The Blueprint of What I Did
This is a blueprint of how I got started. Depending on which bank you're with, it could take less than 10 minutes to start securing your financial freedom. It is absolutely worth it.
How I got started:
- Opened the following bank accounts:
- Chequings account
- High Interest savings account
- Set up a pre-authorized transfer to move a percent of my paycheck into my chequings account every pay day (I found that this could be adjusted online without talking to anyone). I started with 10% of paycheck. To be honest I was scared for the first 6 months, I wasn't sure if I could survive by putting that amount of money aside. But not only was it totally fine, I've since increased it several times over the years. I guarantee you'll more than double that number within a couple years of starting this strategy - and you'll be happy about doing it. More about this powerful strategy here.
Here's what this looks like:
When I started with nothing, this is how I built savings for my solid cash base, I wanted to have an emergency fund incase something unforeseen happened in my life that would otherwise put me into debt. Having a solid cash base also gave another source of self worth, self confidence and allowed me to make better decisions to live a more stable life.
What's up with that red line?
Oh I'll tell you...
The most fundamental lesson I learned from my mentors:
That red line is what makes or breaks investors.
Here's where all I've written about mindset, sticking to your goals, commitment and self discipline are tested. If financial freedom is what you want - and I mean if it's what you really want, you cannot withdraw or spend your money once it's passed that red line. You should consider it already spent - already spent on your future.
If you're not at this point yet mentally (and you'll truly know deep down), I encourage you to read some of the other posts on this website like Shiny Ball Syndrome, or Buying Assets not Liabilities - they just may change the way you fundamentally think about money.
Now to invest (and put those savings to work)
- Open the following investing accounts:
- TFSA Investing account
- RRSP Investing Account
- Setup a pre-authorized purchase plan, or manually purchase investments in your 2 investing accounts TFSA and RRSP with lump sums of money from that growing High Interest Savings account you've been filling automatically.
Here's what this looks like:
...and keep moving money from your paycheck into your investments, until you've built such a humongous nest egg, that the direction of the above diagram changes. Your investments start spinning off enough cash that they pay you. So much so, that they pay your entire lifestyle. This is what I'm working towards right now.
These investments grow slow at first, and then very rapidly later on like a snowball effect. Someday, it will be an unstoppable force that you can direct towards whatever you want.
For me, it has always been my dream to help others in a significant way. It is the single reason why I'm driven to invest. I put this website together to help document my journey, so that when I eventually achieve financial independence, there was a record of how I got there, so that others who seek to achieve the same thing have a blueprint. I deeply want to change the world for the better, helping others along the way is part of that.
The reward for staying committed to investing in your future is that you get to take that red line and put it over your job, you don't need it anymore. Your investments will become your source of income.
What are TFSA & RRSP?
You want to think of a tax-free savings account (TFSA) as a basket. And.... right off the bat, it’s not a savings account - don't know who decided to call it that. You are in charge of picking what to put in that basket from a variety of financial instruments, things like—exchange traded funds (ETFs), guaranteed investment certificates (GICs), mutual funds, stocks, bonds, and of course actual savings accounts. Whatever gains you make from the investments in that basket are tax-free. The Canadian government introduced TFSAs in 2009 as a way to encourage people to save money for retirement. Since you paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out.
Too good to be true - so there’s a limit to how much you can put into a TFSA. So far, the limit has gone up a little bit every year. Right now, you can contribute a maximum of $5,500 a year. You’re eligible to start as soon as you’re 18 years old.
What are the pros?
The main pro is its tax free, so you’re crazy if you don’t take advantage of it.
You don’t have to pay taxes on the money you make. If you invest $1,000 right now and it becomes $50,000 by the time you retire, that $49,000 you’ll have earned is tax-free.
Second, you can quickly and easily take money out any time you want (although, I advise against this). There is no penalty to withdraw money— and if you do, the amount is added to how much you can contribute the following year. For example, withdrawing $5,000 this year means that next year you’ll be eligible to contribute the normal $5,500+ plus $5,000.
A bonus for retirees: The money you withdraw from a TFSA isn’t considered income, so retirees can take money out without it affecting retirement benefits like Old Age Security, which decreases with higher income.
Things to be careful about
Because you'll be using the Pre-Authorized transfer strategy to build savings and invest in your TFSA account - it’s easy to lose track of how much you’re contributing. If you accidentally over-contribute (i.e., put in more money in a calendar year than you’re allowed by Canadian law), you will be charged a penalty of 1% per month on the amount in your TFSA that is in excess of the limit. You also can't day-trade using your TFSA account - or the government will come knocking. But trading and investing are 2 very different things - this website is all about investing.
A registered retirement savings plan (RRSP) is an account designed to help save for retirement. The money in an RRSP can be used to buy a whole range of investments like — mutual funds, ETFs, stocks, bonds etc... While the investments are held in your RRSP, you won’t have to pay tax on any interest, dividends, or capital gains you earn.
Some rules you should know: you’re limited in the amount of money you can contribute to the account in any given year. The amount changes, but for 2017, it is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $26,010, whichever is smaller. You can also catch up if you didn’t max out your investments in earlier years. (To find out how much you can contribute, check out the Notice of Assessment that you got after filing your taxes last year.)
What are the pros?
Here you can contribute money before it gets taxed. That means that you can subtract the amount you contribute from your income and pay less in income taxes. If you made $60,000 and you contributed $5,000 to your RRSP, you will pay tax on only $55,000 of income. You will eventually have to pay taxes when you withdraw your money, but the idea behind a retirement investment account is that you only withdraw the money when you retire and have a very, very low income and low tax rate.
There is an exception where you can withdraw money if you’re using it to buy a house or go back to school, as long as you put the money back within 10 years for education loans and 15 years for home purchases.
Things to be careful about
The government charges a hefty tax penalty to withdraw funds early (10% to 30% immediately but possibly adjusted when you file your taxes). Most Canadians forget to factor in that they will be taxed on the money withdrawn even in retirement. Also, the government requires you to close your RRSP by the end of the year you turn 71 and use the money to buy a registered retirement income fund (RRIF) or an annuity.
So What Investments do I buy?
At my core, I believe in the importance of diversifying my investments.
This has always been a critical lesson I've learned from mentors and successful investors. I'll dedicate an entire post towards this soon. But for now, trust that diversified investments hold up against a rising and falling stock market for many important reasons.
At the time of writing this (2017),
I’m investing primarily in Index ETFs.
In more technical jargon: For the majority of my investments, I believe in building a diversified, low-maintenance portfolio designed to deliver the returns of the overall stock and bond markets with minimal cost. This strategy can reduce my costs by as much as 90%, while at the same time beating the majority of mutual funds and professionally managed accounts.
The strategy is called index investing, or passive investing.
This is an online resource that perfectly explains the strategy and even provides model portfolios for beginner to advanced index investors: Canadian Couch Potato.
I’m not affiliated with this website in any way, but they do an excellent job summarizing options available, they also have a wealth of knowledge on all things financial.
If you check out their model portfolios you’ll see 3 options which progress from less involved (hands-off) to more involved (hands-on).
When I work with beginner investors, I encourage them to find a level that they can stick with. It is often discouraging to be overly hands on when you first learn something, and the worst case scenario is that you give up entirely. Giving up too early, is one of the main reasons people don't get into investing.
i.e. be honest with yourself and don't go for the most advanced level if you won't truly stick with it. For myself, I found that building good habits around saving and investing was the trick that really allowed me to stick with it ever since I was a teenager.
A note about the use of the High Interest Savings account in-between the chequings and investments. I use this to hold my cash savings (emergency funds), incase something unforeseen happens. It's a high interest savings, because I might as well make as much money I can if the money is just sitting there not in an investment.
The idea of this money is that it will prevent me from plunging into debt due to sudden and unexpected expenses in life.
Ideally, other than my emergency funds, I don't really want my money sitting around because then it's not working for me.
In addition to safe, diversified Index ETFs, I also buy more speculative risky investments like individual stocks and foreign exchange currency. But I only do this because I feel secure with the first two stages of building the wealth pyramid. I can honestly say, I would truly be unemotional about losing speculative investments - this is a mentality that has taken me about 15 years to develop.
I'm sure things will change as I transition into other life stages, like having kids, buying real estate etc... I'll keep you updated if things change.
This is the end of the post! I would now encourage you to take the first steps, open your bank accounts and setup your pre-authorized transfers. Depending on what bank you're with, it could take less than 10 minutes to start securing your financial freedom, and it is absolutely worth it.
If you're looking for a great resource to get started investing, I recommend this book. A lot of the concepts I use originated from this book way back in the day. I'm now primarily a passive investor, which means I sleep well at night knowing my money is growing without my constant attention.
TL:DR - There is no TL:DR this time - this post is the blueprint of what I've done over the last 15+ years. I encourage you to take the time, read it over and treat it like a checklist. Open your bank accounts, setup your pre-authorized transfers and buy diversified investments. Eventually your investments will start paying you and your lifestyle. It is absolutely worth it.
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