Stocks! You've heard of them, I'm sure! But do you really know what they are?
This post gives you a quick briefing on what stocks are. Ready?
What is a stock?
A stock is an investment security that represents ownership of a company. When you buy stock, you become an owner and investor in that business. You are now what they call a shareholder.
Stocks are also known as shares. When you buy shares, you are buying pieces of the company to own.
Why should I buy stocks?
When you become an investor and owner of a business, you are entitled to your share of the business profits! When the company makes money, you make money! When it loses money, you do too. But those are risks worth taking when you are a business owner.
How do I get my share of the profits?
TFSA: sounds fancy. The financial institutions will tell you to open a TFSA and it's TAX FREE, but do you really know what it's all about?
What is a TFSA?
TFSA stands for Tax Free Savings Account. In 2009, the government of Canada introduced a new way for Canadians to save money for retirement, a rainy day and more. But it's so much more than a "savings" account.
You can invest in a TFSA!
Although the name includes the word "savings", this account is a solid account for investments. Whether you invest in mutual funds, ETFs, stocks, bonds or REITs, this account can help grow your savings on a tax-free basis!
Wait, so what do you mean by tax-free?
Each year, as of 2017, you can contribute $5,500 of your hard earned cash into your TFSA. From there, any dollar made or lost inside of the account can be withdrawn at any time without paying taxes on it!
If you remember my post about saving $3,600 a year, you could invest that amount into a TFSA and grow it over time. By not paying tax on your earnings, you grow the account faster than if you had a normal non-registered account.
Learn what a TFSA is in 2 minutes!
What is a TFSA?
It's a tax free savings account! You can save and invest with this account on a tax-free basis!
What can I do with this TFSA?
You can save cash in this account! But a more useful approach would be to save cash and then invest it routinely and frequently.
Why should I invest in a TFSA?
Think about investing $10,000 into a TFSA. You make 10% in the year. You made an extra $1,000! Do you like paying taxes? No, I didn't think so. With a TFSA, you get to keep all $1,000 of profits! The government let's you grow your assets in this account in a tax-free way!
What can I invest in?
We all need to start from somewhere, right?
Do you remember that New Year's Resolution you gave yourself to go get active and hit the gym? Now remember how hard those first two weeks were to consistently go to the gym?
All habits are formed within a couple or more weeks of consistent routine. Now what I'm about to share with you has to do with your financial health. And guess what? It's easy to maintain, and its realistic. Let me explain.
Just like going to the gym 3-5 times a week after several weeks, it becomes a habit and a part of your lifestyle. What I've been doing personally for a number of years has been to pay my future self first every week. How?
As a millennial, I've grown up with technology all my life. Since I was 16, online banking was available to me, so it's been really easy for me to set up an automatic savings plan for myself. What I've done differently in the past years, however, was change that automatic savings plan into an automatic investing plan.
Each Wednesday, I would allocate $70 to my savings account. Before you know it, my tiny $70 weekly contribution to my savings account became a massive cash cow and needed to be invested. So I did that. For my first two years, my savings account had $7,200 in cash that I saved until I could legally invest. And when that day in June arrived, I transferred all the funds to my investment account and bought some stocks. I continued to invest this $70 per week into the account, and it has grown since then.
Check out the way our dollar bills can grow at 9% annual returns, investing $70 every week for 52 weeks:
The result? $70 a week turns into $3,600 in your savings account over a year. And if you invest it instead? You could potentially grow it at 9% and turn it into $3,800! That's one way your money can work hard for you.
But in order for you to do this, you need to be greedy and pay your future self first. Your pay is biweekly? No problem: pay your future self $140 each pay cheque. Twice a month? $150 per paycheque. The point is: be greedy and make it a priority.
Now, you may be thinking: "Ary, this is too much for me to save each week! I got rent and bills to pay!" To that, I say true. But when you think about it, that's actually just $10 per day you are already spending on coffees, dining out, seeing a movie once in a while, etc. Can you give up your $6 Starbucks Pumpkin Spice Latte for the day (sorry I don't know many of the drinks at Starbucks, haha) or your $30 meal and $8 glass of wine for the dinner out on Friday? Can you work one more hour per day, even at minimum wage ($11.40 in Ontario), to make that extra $10?
Now, don't get me wrong: spend and treat yourself to enjoy your life! But be aware that "little" expenses do add up! So track what and how you are spending your earnings periodically. But that's a post for another time.
With that said, it's true that many of us know how to spend our money, but don't know how to save and invest it. Let's start a new habit in our lives and fund the future you with a nest egg of investments to pave your path to financial freedom. It just takes $10 a day to start.
With Canadians facing all time highs in consumer debt, understanding what it means to have a solid financial foundation is critical to long term financial stability. You see, many companies try to provide you with certain services and products that only benefit the company and are not always the best solution for you and your family. When you have someone trying to sell you on locking in your savings into a low interest rate GIC (guaranteed investment certificate) that can't even cover inflation (we'll discuss that in another post) or someone advising you to invest into mutual funds when you have a lot of credit card debt, these companies are not putting your best interests at heart. They are not taking care of all aspects of your financial situation in an effective order.
We need to grasp the fact that a solid financial foundation comes from an understanding of how to arrange our financial priorities. It can be broken down into four different levels of needs: protecting yourself and your family, managing your debt, developing an emergency fund, and investing in growing assets.
Let's start with "Protect yourself and your family":
Protection comes in the form of insurance. Now, think about it like this: if you became disabled and couldn't work, you would lose income that would help support you and your family. What if you passed away suddenly and your family was left with the burden of paying the mortgage, car payments, utility bills, groceries and more, and that pay cheque they relied on no longer comes in every two weeks? With insurance, you can protect your family from such risks of financial hardship should that unfortunate event happen too soon. The small cost you pay each year is worth the peace of mind for life.
This leads me to "Manage your debt":
Now that your family is protected, you can start focusing on paying off the car payments, the credit card debt, etc: the debt with high interest rates. You want to focus on this step next because not paying off debts high in interest could end up being very costly in the long run. Who wants to pay 22.95% interest on their credit card purchases? Not me! Pay off the highest interest debt ASAP. If you can't pay off the bill each month, changes need to be made on your spending and you may even have to consider consolidating your debt at a lower interest rate, but we'll talk about those things another time.
Once you have your debt managed and in control, this is the time to "Develop an emergency fund":
Some of us work for ourselves and some of us are employed with job stability. No matter the situation, sometimes life happens and we end up in a position where the money coming in isn't covering the bills going out. Setting up an emergency cash savings fund you can access in a heartbeat will help secure your family in such a position.
Lastly, we can then look to "Invest in growing assets":
Now that we've built a financial foundation, we can top it off with our investing needs. Money doesn't hold its value over long periods of time. Thanks inflation! Because of this, investing our extra funds into growing assets like stocks, bonds, real estate and more, can help beat inflation, grow our wealth and fund our retirement (and if we're tackling it right, even early retirement)!
You see, with these four principles, we can organize our behaviour and choices with how we manage our money. We should focus on building the base before tackling the top. Just like a house, you don't build the roof first! You lay the concrete foundation, build the walls and cover it with the roof. Setting up a solid financial foundation is important because it organizes how we prioritize our cash flow and its overall effectiveness in wealth creation. Tackling these principles in the proper order allows for a better chance of achieving financial freedom sooner. It is possible and the knowledge is out there for you to learn how to take control of it yourself. Join one of our free workshops to learn more.