Tag Archives: investments

Don’t Chase Performance

 

I really shouldn’t have to write this article. If you look online there are thousands of similar articles all trying to tell people the same thing. In fact, nearly every single investment presentation in Canada contains some form of the same “Past performance is not indicative of future results”.

 

Why is it that we have to keep being told over and over again, and yet we still don’t learn our lesson?

First, let’s look directly at what I’m talking about.

 

You are offered the choice of two investments. Investment A has been declining in value for the past 10 years and is currently worth 70% of what it was worth in 2011. Investment B has been screaming higher over the past 10 years and is currently quadruple the value it was in 2011.

 

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Start Saving Now

start saving now

 

We’ve all done it.

 

We decide we are going to do something, or we know its something we need to do, and yet we find a way to put it off. Like many others, I used this approach during university and had to franticly binge study the night before most exams and papers were due. Fortunately, I took my finances seriously at a young age. However, I know this isn’t the case for most people.

 

Why do you need to start saving today? Well its simple. It will have an enormous difference in your future financials. Seriously. Saving early is the number 1 way to build wealth over your lifetime. I’ll show you an example of why.

 

Heather & Jack

 

Let’s take two twins. Jack & Heather. Jack & Heather are 20 years old today. Heather decides she wants to save $500 a month from the time she is 20 until she is 30. Jack would rather spend his 20’s living and start saving when he is 30. For both of them we will assume their investments earn a net return of 7% for the entire period.

 

Heather saves $500 a month for every month from 20 years old until 30 years old. By the time she is 30 she has saved up $86,009. Heather stops contributing. She never adds another dollar to her investments. She contributed $60,000 to her investments.

 

Heather savings growth chart

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What is an RRSP?

What is an RRSP?

The RRSP, also known as the Registered Retirement Savings Plan, is the primary retirement savings account for Canadians. The main benefit of the RRSP is the ability to defer income tax and grown investments tax free as a way of saving for retirement. In other words, money you put in today is not taxed, it grows tax free, and you only have to pay that tax when you withdraw.

 

RRSP Deposit chart

 

Just like the TFSA, an RRSP is not an investment. It is rather, a type of account that can be used to hold different types of investments. It is not uncommon for people to believe that the RRSP itself is an investment, as they are unaware of what they are invested in within the RRSP. You can hold a variety of different investments inside an RRSP.

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What is a TFSA?

What is a TFSA

 

 

A TFSA, or Tax Free Savings Account, is a type of savings account able to hold a wide variety of investments. The primary benefit of a TFSA account is that any income generated by the assets within the TFSA grow tax free. That is, if you put $100 into the account, and it grew to $200 you wouldn’t have to pay any taxes on this growth.

How a TFSA Works image

One of the most often confused parts of a TFSA, is that it isn’t actually an investment itself. I often hear people talk about how they have invested in a TFSA and are confused when I ask what it is invested in. A TFSA is not simply a savings account where you are paid a small interest rate on the value of money within it. You can however hold a high interest savings investment vehicle inside a TFSA and this is a very common option at the bank and is the reason for the common misconception.

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