If you don't consider yourself financially savvy, don't worry; you're not alone.
According to this report, less than half of Canadians surveyed passed a basic financial literacy test. Even fewer may understand the ways they can invest.
A common pitfall for those who are new to investing, for example, is the appeal of low-fee investments. But what many people don't understand is that when you only consider the fees, you're missing out on the bigger picture.
When you only look at fees without considering performance, you might find yourself paying less, but you could also be earning less. That's why it's important to understand all your investing options.
The reality is that investing can be an effective way to build up your financial well-being over time, and it can be easier than you think. But to successfully build your financial future, you need to have all the facts, and these simple tips are a good place to start.
It's Important To Have Short-Term & Long-Term Goals
When it comes to investing, think about why you're doing it.
You likely have some ideas already about what you'd like to achieve. Do you want to buy a new car? A new house? Invest for retirement? Save for a wedding?
You'll also find it's easier to stick to a saving and investing plan when you have clear goals in mind. This can help you make better decisions about how and where you can be investing.
Know How Much Risk You Can Handle
Some investments are considered more conservative (low risk) and others are considered more aggressive (high risk). Before you choose which one is right for you, you'll need to understand what amount of risk you're comfortable with and can afford.
Are you someone who is comfortable with risk and you're okay with market ups and downs, where your investments might lose as well as gain money? Then you may be good with higher risk. If market swings make you nervous, and you're good with smaller money gains for less risk, you may be a more conservative investor.
Whatever your "personality" as an investor, keep in mind that your money will only grow if your investments perform well.
There's A New Alphabet For You To Learn
Understanding the vast array of investing products and services can help you pick what's right for you. There are the products you can invest in, such as GICs, ETFs and mutual funds. Then, there are the plans you can use to hold your investments, such as RRSPs and TFSAs.
There are also the different ways you can invest — through an advisor, by using an online investment management service or on your own through a DIY online brokerage. We'll delve into that soon.
If you're stuck wondering what all of these product and plan initials mean, we've got a quick primer for you below. And if you'd like to learn more, RBC has a website full of key information.
- GICs (Guaranteed Investment Certificates) are a low-risk investment option. You purchase a GIC for a set amount of time and you earn a set amount of interest; some GICs also offer variable returns. Depending on the type of GIC, you can make money on your investment — or lose that money — but your original investment (principal) remains secure.
- TFSA (Tax-Free Savings Account) is an account you can make contributions to each year (capped at a certain annual limit). Any money you make within investments inside your TFSA is tax-free; you can also take money out at any time – two key differences compared to RRSPs (see below).
- Mutual funds are created from the money contributed by many investors, pooled together to buy a portfolio of different securities (stocks and bonds). Mutual funds are managed by professional portfolio managers.
- ETFs (exchange-traded funds) trade like a stock on an exchange. Like a mutual fund, you can buy "units" in an ETF to own a portion of the interest in a pool of assets (for example, stocks or bonds).
- RRSP (Registered Retirement Savings Plan) is a key retirement savings option for Canadians. You can make annual tax-deductible contributions, based on your income, allowing you to lower your tax bill in the current year. The tax on your contributions and earnings within your RRSP is deferred until the funds are withdrawn from the plan – ideally at retirement, the long-term goal for RRSPs.
You've also likely heard the saying: Don't put all of your eggs in one basket. Well, the same best practice applies to investing.
With mutual funds and ETFs, you can pool together a variety of stocks, bonds and other investments to create a portfolio. Spreading out your investments lowers your risk because it helps smooth out your returns.
Understanding each of these in more detail will help you choose the best path for your investing goals and your financial plan.
You Don't Need To Be Loaded To Start Investing
Most people believe you need to have a lot of money in order to start investing, but that isn't true. In fact, starting young with small amounts is the best way to grow wealth over time — even $10 a month can make a big difference. The key is consistency and making sure what you choose to invest in is performing well.
When using an online investment management service like RBC InvestEase for example, you can open an account with any amount and then your money will be invested for you when your account reaches $100. The process is super simple: just answer a few questions online to get started, then let the portfolio advisors at RBC InvestEase do the work for you.
And if making a positive impact with your investment choices is important to you, you can also open a Responsible Investing portfolio, which includes companies meeting additional risk management requirements to align with responsible investment values.
Practice Makes Perfect
Trading can be intimidating and you might not know where to start. Before you take the training wheels off, you can practice trading without using your own money with a Practice Account from RBC Direct Investing. You get $100,000 in "pretend money" to practice making trades and watch the results. Once you're comfortable with how it works, you can open a real account and start making real trades.
RBC Direct Investing is an online brokerage for DIY investors, so you don't get advice. What you do get is access to a lot of online resources, including how-to videos, investing guides, research and a secure social community — all to help you learn and build your confidence as a self-directed investor.
You Can Make A Plan Online
Remember the goals we mentioned earlier? Once you have those in place, you can create a financial plan to help you reach those goals.
Through the MyAdvisor digital platform, you can see exactly how much money you have across all your RBC banking and investment accounts and make a personalized plan for your savings and investments. And if you need to, you can connect with a financial advisor or planner in your community (by live video, phone or in-branch) for advice.
MyAdvisor allows you to explore interactive scenarios and see the potential future impact of the money decisions you make today, like saving up to buy a new home in a few years. You can do all this while getting a full view of your money — from your savings and investments to your debt — all in one place.
The Not-So-Secret Tip To Help You Build Wealth
Making regular contributions over time will help your investments grow. And compounding interest – which is essentially earning "interest on interest" – can be a powerful tool in building your investments over time. No matter if you only have $10 to contribute each month – as we said before, consistency is key. You can set up automatic transfers every month from your bank account to go into your investments.
Become The Investor You Want To Be
Adulting can be tough. You're trying to build your financial future while also paying your bills and navigating whatever's facing you today. But it also means you're in charge of your choices – and choosing to invest can have a big impact on the life you envision for yourself.
As you begin to explore your investing options, you may find that you're not just one kind of investor. You can mix and match by doing some DIY investing, some "you take care of it for me" investing, and some investing where you've connected with the expertise of a financial advisor or planner.
RBC's wide range of investment services is available to help you no matter how you want to invest. Give yourself a good start by checking out RBC Direct Investing, RBC InvestEase and MyAdvisor, with related disclosures included there for each.
To get started with investing, learn more about your options with RBC on their website or check out their Facebook, Instagram, and Twitter for more info.
This content is for general informational purposes only and does not constitute financial, investment, legal, tax or accounting advice.