What is an Investment?
Investing is the act of putting money into a financial asset or business with the goal of generating income or capital appreciation. There are many different types of investments, including stocks, bonds, mutual funds, real estate, and more. When you invest, you are essentially buying a stake in something with the hope that it will increase in value over time, or generate a steady stream of income. The goal of investing is to earn a return on your money, either through capital appreciation (the increase in value of the asset) or through regular dividends or interest payments.
Note: Investing carries some level of risk, as the value of your investment may fluctuate and there is no guarantee that you will earn a return. However, with careful research and diversification, the potential rewards of investing can make it a valuable tool for growing and preserving your wealth over the long term.
Why Should you Invest your Money?
It can help you earn more money than a regular savings account, save for long-term goals, and protect your money against inflation. While investing carries some risk, careful research and diversification can help mitigate this risk and increase your chances of success.
Here's an example of what you could earn through investing:
- Initial Investment: $0
- Regular Bi-Weekly Additions: $250
- Interest Rate: 10%
- Years: 30
- Total Investment: $1,117,373.46
There are two important takeways here.
- If you had only saved and not invested, you would have saved only $195,000 over the same time period. But if you had invested that money, you would have earned an additional $922,373.46. That's a difference of $727,373.46 by deciding to invest your saved money. That's a lot of money.
- By investing your money, you will retire a millionaire with only $250 bi-weekly contributions. That's a very small amount of money to ensure you'll become wealthy.
How to Invest your Money
First you'll need an account from what's called a brokerage. A brokerage handles the headache of actually taking your money and purchasing the investment. Since previously, access to self directed brokerages was low, many people in previous generations defaulted to also relying on a financial advisor to tell you what to invest in. There are two problems with this:
- 1. The financial advisor has an incentive to sell you investments that make them the most money, rather than make you the most money. There are many cases of this happening.
- 2. Fees associated with financial advisors eat up your returns, and result in a significantly lower investment outcome over time.
For this reason, I suggest doing your own research and investing in historically proven methods. It will save you hundreds of thousands, if not millions of dollars.
Now back to that brokerage. You'll want to find a self directed investment account through a brokerage that operates in your country. If you're in Canada, I suggest you use Wealthsimple since its so user friendly and the fee's are superbly low.
Note: It's important to set up a self directed account, as this will give you the flexibility and low fees needed to earn the most over time.
The other thing to note when opening up your wealthsimple is the type of account to open up.
Account Types
There are many types of accounts that you can open up. Here are the ones to consider with an explanation:
TFSA
A TFSA (Tax-Free Savings Accounts) is a government-registered savings plan that allows Canadians to save and invest money without paying taxes on the gains made on the investments. This feature of not paying taxes on the gains is what makes the TFSA so lucrative. Without tha TFSA, you would get taxed the rate of capital gains every time you make a gain on the sale of an investment. This can be a significant amount of money. Capital gains tax takes your gain on an investment and taxes it at your marginal tax rate on half of it. For example, if you make 10,000 on an investment, and your marginal tax rate was 40%, you would pay 2,000 in taxes on that investment. This is a great way for the government to take your gains.
RRSP