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Investment Accounts

Last week I discussed the different types of investments that a person can make (Types of Investments). This week I will be discussing some of the different accounts you can open. We have spoken previously about the importance of having multiple accounts. Having multiple accounts can help create friction when budgeting your money. Making it more difficult to access your money can have very large benefits in the long term. Multiple accounts is just one way to insure this occurs. There are a number of accounts a person can open including LIPAs, GRSPs, RESPs, and many more. There are many benefits to each account but it can become annoying to figure which one best suits you. By providing a basic breakdown and explanation of the 3 major accounts I hope to help you better understand how they can be useful in your personal finance journey.

Accounts

  1. TFSA
  2. RESP
  3. RRSP

TFSA

A TFSA or tax free savings account is an account that shelters interest earned, dividends and capital gains from tax. A TFSA can hold a large number of investments including mutual funds, securities, bonds and cash. A TFSA does have a yearly contribution limit determined ever year by the CRA. The contribution limit for 2021 is $6000 and TFSA owners are able to contribute up to $6000 plus any contribution limit carried over from previous years.  If you have never contributed to your TFSA and you were eligible for a TFSA when they were first introduced in 2009 you would have a contribution limit of 75,500 as of 2021. A TFSA can only be opened once you turn 18. After turning 18 any amount of contribution limit that hasn’t been fully used is carried over to the following years. The majority of people use TFSAs as their main vehicle for investing in stocks. Unlike an RRSP a person can withdraw from their TFSA at any time. Any amount taken from their TFSA is added to your contribution limit. A TFSA has many advantages including saving for retirement, tax free growth, tax free earnings, withdrawals and more. A TFSA is a great way to begin your personal finance journey for investing, if you don’t already have one I would consider getting one to capitalize on its many benefits.

RESP

An RESP is typically used by caregivers in order to save for a child’s post-secondary education. A person can contribute to a family RESP until the beneficiary turns 31. While a person with  an individual RESP can contribute to it up to 31 years after the plan was opened for the beneficiary. At the end of either RESP the account must be terminated. The maximum contribution limit is 50,000 per lifetime but there is no annual limit. Over-contributions are taxed at 1% per month of the over-contribution. The beneficiary of a RESP must be a Canadian resident and have a valid SIN number. RESPs not only provide the user access to the Canada Education Savings Grant (CESG)  but they also generate tax deferred income. The Canada Education Savings Grant is an amount of money given to each family based on the amount contributed to their RESP. The maximum grant a person can receive is $600 a year with a lifetime maximum of $7200. Those that are eligible will receive $500 of CESG contribution room yearly. Any unused contribution limit for a child that is under 18 is carried on to be used when contributions are made. Withdrawing any funds for non-educational purposes imposes tax consequences as well as returning any amount of CESG that you have accumulated. Although this account may not seem like an investment. An education is the greatest investment a person can ever make or be gifted. For this reason it is just as important as the other accounts and should be one of the many things you consider after having children.

RRSP

A registered retirement savings plan is a type of financial account in Canada for holding savings and investment assets. RRSPs have many advantages such as saving for retirement, tax deductions on contributions, and tax deferred growth. Unlike a TFSA any tax payers younger than the age of 71 can open and begin to contribute to a RRSP. The contribution limit is also determined by the CRA and is 18% of your previous years income or $27,230 in 2020. Any income you earn in the RRSP is exempt from tax and only taxable once payments are taken from the account. Withdrawing from this account before retirement requires a deregistration for a partial or full withdrawal and comes with tax deductions. This can be included in your taxable income in the year the withdrawal was made. On the last day of the year when a person turns 71 their RRSP matures and must be rolled over to a RRIF, purchase annuities or withdraw all money from the account. On top of CPP and eventually Old Age Security (OAS) your RRSP is a great way to fund your retirement.

All of these accounts may not be applicable to you at the moment but the average person will end up using some or all of these accounts at some point in their life. It is important to research all of the benefits to these accounts because you may be missing out on potential tax savings and greater protection on the money you have accumulated.

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Types of Investments

Investing is an essential part of a person’s finances. Investing comes in many different forms, but it is done with the expectation of achieving a profit from an initial purchase. Typically we associate investing with the purchase of stocks or these days cryptocurrency. Investing can include but is not limited to putting your money in financial plans, shares, property, or the development of a commercial venture. Whether or not you handle your investments or the responsibility is given to a financial advisor investing helps to ensure future long-term financial security. You can check out some of my past blogs to learn about the importance of investing (Investing 101). Today I will be discussing some of the most well-known investments.

Types of Investments

  1. GIC
  2. Bonds
  3. Stocks
  4. Property
  5. Cryptocurrency

GIC

A GIC or a Guaranteed Investment Certificate is a low-risk savings account where the money is deposited in a lump sum and the interest rate is locked in for the term. While this method will not produce a high yield it can be a great place for people to store money who are looking to take their money out at a specific period of time and cannot risk fluctuation in the value of their money. These cases may include money deposited for a down payment on a house, purchase of a car, or home renovations. The interest rate offered is usually slightly higher than traditional savings accounts therefore it can be a good place to store funds you do not expect to touch such as your emergency fund. Overall GICs are a safer and much more conservative investment than stocks or bonds and are offered by almost every bank or credit union.

Bond

A bond is a fixed-income investment. The government or companies raise money by borrowing money from investors with a promise to pay back the investment with interest over a certain time frame. Bonds can often be used to offset more volatile markets and make your portfolio more stable. A strong bond portfolio can even outperform many stocks during a bear market and help to provide a cushion when equities are struggling as they move in the opposite direction of interest rates. As equities fall so does the interest rate and bond rates increase.  Bonds are a low-risk way in order to diversify your portfolio. They provide a consistent stream of income and can be considered in every portfolio.

Stocks

Probably the most well-known type of investment. Stocks are an investment that is an ownership share within a company. People tend to invest in companies that they expect to go up in value. Stocks tend to get the majority of the media attention and are a good place to put a significant amount of your assets. Stocks have many advantages such as growing in value with the economy. Corporate earnings tend to increase at a similar rate to the economy and with technological change constantly expanding production possibilities, our efficiency and output grow which increases profits. Stocks average a return of 10% a year and therefore they help to keep the value of your money ahead of inflation. Stocks have a plethora of benefits and are a great investment. Any portfolio should have a significant amount of its assets in stocks.

Property

Property requires a large upfront investment but is able to provide the investor with income from, rent, and appreciation. If the property is being used for personal use it can also be a means of generating business profits. Property is a fairly stable source of income and can help to diversify a portfolio. While stocks are liable to change in a short period of time a renter is under contractual agreement to continue payments until the end of the term. This allows a property owner to know the amount of income they will be receiving for that given period without risk. Although an expensive addition to a portfolio property has a number of benefits and should be considered.

Cryptocurrency

There are many benefits to investing in cryptocurrency and it is worth checking out one of my previous blogs for more information on cryptocurrency (What is Cryptocurrency?). In summary, cryptocurrency is a highly volatile market that has the potential for investors to significantly appreciate their money. Cryptocurrency is very new but it has the technological advantage of becoming the currency of the future. It has already proven that it is here to stay but still has to prove itself as a store of value, unit of account, and medium of exchange to become a widely accepted form of money. A portfolio can be very successful without cryptocurrency but if it is to be added consider having as little as 5-10% of your entire portfolio.

As you can tell there are many types of investments and the important thing to know is that they all work in some capacity. It all depends on your risk tolerance, the goals you want from your life, and many other factors. It is important to do your own research and talk with experts within the industry to determine what the best investments are for you. You can check out our Instagram @therichcollegestudent to learn more about risk tolerance and what may affect your investment decisions.

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A Money Diet

Fixing your money mindset is much like a diet. The definition of a diet is the restriction of oneself to special kinds of food in order to lose weight. We have all tried a diet at some point, whether it be something as little as I’m going to stop drinking soda or something like becoming vegan. We tend to try these diets in order to improve some aspect of our lives. Today I will be discussing money and the connection to diet. We can implement some of the same techniques in dieting to personal finance. By restricting some of the things we can consume we can dramatically change aspects of our life for the better. It depends on the person but maybe you can sustain a massive change to your money diet, like completely cutting out expenditure on perishable items or maybe it’s something as little as refraining from purchasing food once a week. We can all improve our money diet.

Connections

  1. Over Consumption
  2. Gradual changes
  3. Lifestyle

Over Consumption

In a food diet one of our main problems is over consumption, we eat far more than we need. This overconsumption tends to make us feel regret later. The same thing happens with our money. We feel the need to spend money on materialistic items only to regret our decision. Sometimes this regret sets in as soon as you get home. Whether it is seeing what the people around us are doing, developing a FOMO or just wanting more. We tend to consume far more than we actually need without gaining significant satisfaction from these purchases. We can help eliminate this by shopping with people that don’t make this overconsumption possible. Shop on your own or with people that will give you an honest opinion on what or what not to buy. We can also avoid this overconsumption by shopping with a purpose, many times shopping is just an activity to pass time and we end up purchasing things that we don’t necessarily want or need.  By eliminating over consumption we can feel more satisfaction from the items we already have.

Gradual Changes

When changing our lifestyle it is important to make gradual changes. You might have seen people have a drastic change to their eating habits and then a couple weeks later fall right back into the same trap they were in before. With our money diet it might feel necessary to make massive changes right off the start in order to get going, but it is more important to make small changes and slowly increase the intensity of changes. We can start by changing small parts of our life like eating out one less time a week. You can choose to always put at least one thing back when you go shopping. Depending on where you allocate money you can adjust your spending habits to better suit your long term goals.

Lifestyle

As you have probably heard before dieting is not about winning in the short term but making it a consistent part of your life. With our money we don’t want to save money for 30 or 90 days and then go barrelling back into debt. We want to become consistent with our money spending behaviours. This requires us to have a sustainable relationship with money and spending on the spectrum between underconsumption and overconsumption. The amount of money we spend is up to us and we might be closer to spending the majority of our paycheque or we might be able to spend very little of it depending on our expenses and how much money we make. It is important to recognize where you currently are on the spectrum and then identify where you want to be.

Whether or not you stick to your money diet it can be beneficial to give one a try. By trying a money diet it can help you identify aspects of your life that you can get rid of or reduce.

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What is Cryptocurrency?

A cryptocurrency is a digital or virtual currency. Cryptocurrency is backed by cryptography which makes it nearly impossible to counterfeit or double-spend. The original cryptocurrency is said to be Bitcoin which originated in 2009. Since 2009 Bitcoin has risen to recent highs of $70,000 CAD. With the recent stimulus packages released by the government as well as the collapse of the economy due to the pandemic many people have been prompted to turn towards cryptocurrency as an investment. Many cryptocurrencies are decentralized networks based on blockchain technology. Blockchain is a distributed ledger enforced by a disparate network of computers. Blockchain has many applications and cryptocurrency although the primary use at the moment is not the only application. Check out this article for more information on blockchain technology and its many uses (https://www.businessinsider.com/blockchain-technology-applications-use-cases). Cryptocurrencies are not distributed by a central figure. Unlike fiat currencies (USD, CAD, etc.) transfer can be done between two individuals without an intermediate such as a bank. This is beneficial but also slightly problematic as with no intermediary cryptocurrency is non-refundable. The transfer of currency is “anonymous”, it can be tracked very well but the transfer is done from one wallet to another. Cryptocurrency was once said to only be used for black market activity and drug dealers, now gaining attention from major news outlets and accepted in transactions by PayPal, Square and Tesla it has gained recognition as a currency of the future. In this blog I will be discussing the pros and cons of cryptocurrency as well as talking about cryptocurrency as an investment.

Cryptocurrency Cons and Investment

Cryptocurrency as an investment is said to be speculative in a highly volatile market. I will be speaking about cryptocurrency from the perspective of a Financial Advisor or Financial Analysts in regards to the speculation surrounding cryptocurrency. Many Financial experts believe the market is purely speculative and not a good investment for multiple reasons.

One of the reasons is the lack of foundation to back up the price of the currencies. In the stock market advisors use company outlooks, debt to earnings ratios, P/E ratios, and many other metrics to determine the value of stocks. The majority of cryptocurrencies are not backed up by companies and are purely driven off of the “hype” from investors. In relation to the evaluation of companies and crypto in the money market, the price is driven by the willingness for people to continue to buy the currency. Without the want from investors to purchase the currency there is no market.  In the stock market past success does not guarantee future success but it is a very good indicator. A company with a long term reputation of success, an increasing dividend payout and a good company outlook is typically a good investment. The past trends in the stock market are typically analyzed for a 10 year period. Bitcoin has only been around for 12 years, meaning that there is not much of a market to analyze.

Another reason Financial Advisors are speculative is the lack of security around transactions. For many currency exchanges there have been security breaches that steal cryptocurrencies. Holding currency on exchanges can be very risky and therefore it is important to hold currency in secure wallets. The saying goes “not your keys not your coins” when buying, selling and trading cryptocurrency. Whoever has access to the private key can access the funds. Once the currency has left your wallet it is virtually impossible to get it back. Regular stocks face similar issues for many brokerages. If accounts whose money has been compromised inform the brokers immediately the transfer can typically be reversed. There are small issues though. Unlike a bank account where a lack of authorization will restore funds a brokerage account does not have that same legal protection. Although many brokerages are willing to offer a 100% guarantee of the restoration of funds it can still pose a challenge to get your money back.

The final two reasons many Financial Advisors are against cryptocurrency is they prefer to trade long term as well as they worry about regulation from government and banks. Stocks already face regulation from both banks and the government. The central bank has an effect on the stock market indirectly through the quantity of money, interest rate, etc. The trouble is that there is potential for these same controls to affect cryptocurrency. We have also seen “whales” controlling the value of coins that are more centralized such as Dogecoin. This centralization defeats one of the main purposes of cryptocurrency.

Bitcoin although reaching all-time highs recently has faced crashes in the past. Due to cryptocurrencies high volatility you should only invest money that you are willing to lose as the market is very unpredictable. The majority of cryptocurrencies are not centralized therefore if people stop buying/trading Bitcoin its price begins to drop. Understandably financial advisors prefer to trade long term investment. This is for good reason because they stand to make a consistent profit and have many of the characteristics to support a sustainable growth in money for years to come. Whether you are a cryptocurrency enthusiast or against the idea entirely it is important to identify its benefits and downfalls.

Cryptocurrency Pros

There are negatives attached to cryptocurrency but that isn’t to say there aren’t positives.  I will quickly list the benefits as well as a short description of each. Cryptocurrency provides user autonomy. Digital currencies allow the user to control how, where, and when they spend without dealing with an intermediary such as a bank or a government. Privacy is another benefit, unless someone makes their transactions public, transactions are never associated with a personal identity and cannot easily be traced. They still remain traceable but much less associated with individuals than transactions that use an intermediary. Another benefit is the peer-to-peer focus of cryptocurrency. Funds are able to be sent without the approval of any authority. Other benefits include, but are not limited too: Little to no transaction fees, easier international trading, no third party holds or seizures, and the decentralization of funds.

With the IPO of Coinbase and the introduction of other cryptocurrency trading platforms. The question isn’t whether or not cryptocurrency is here to stay but rather how quickly will it be globally excepted? Regardless of whether the market goes belly up and fails the technology of blockchain and the uses of cryptocurrency have massive potential and uses within today’s world. Ignoring the possibility of a future with cryptocurrency as our main means of buying, selling, transferring funds, etc. would be foolish.

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Personal Finance Books

The RCS blog was inspired by some of the books I have read. My personal finance journey has just begun but these books have been instrumental in starting it. They provide important information and different perspectives on how our money should be used. There is no one way to spend your money correctly and these books help to emphasize that. After reading one or a few of these books you will understand that there are a few constants in personal finance such as living below your means, building a safety net, and many more.

  1. Rich Dad Poor Dad
  2. I Will Teach You to be Rich
  3. The Millionaire Next Door

Rich Dad Poor Dad

Rich Dad Poor Dad written by Robert Kiyosaki tells his story of growing up with two dads. One his real father and the other his “rich dad”. The book explains how important it is to have your money work for you and building the correct money mindset. Rich Dad Poor Dad has sold millions of copies and advocates for important topics such as of financial literacy, financial independence, and building wealth through investing in appreciating assets. The book also explains some of the macrostructures that teach us how to think about money, the book separates us from these structures and allows us to develop a relationship with money that is better able to benefit us as individuals. Put it on your reading list as it can change the way you look at money and finances.

I Will Teach You to be Rich

A must read book for those attempting to start their “Rich Life”. I Will Teach You to be Rich is a New York Times and Wall Street Journal Bestseller. I have been a major advocate for this book ever since I read it. The book originally written in 2009 by Ramit Sethi was recently updated in 2019. Whether you read the older or newer version the information remains fairly consistent and still holds value in the current day. This book is a big reason why I started my blog and many of my posts are inspired by concepts within the book. I Will Teach You to be Rich focuses on concepts such as paying off student debt, setting up no-fee, high interest bank accounts, and automating your finances. Ramit is able to teach valuable information while using very simplistic language and providing a step-by-step logical book for financial success. With a focus on young people the book has been able to provide valuable information to a generation that is notoriously bad with using their money. A perfect book to begin your personal finance career with.

The Millionaire Next Door

The Millionaire Next Door teaches the reader that the people we think are millionaires are probably swimming in debt. The people we think are millionaires live a consumerist lifestyle and although they might be making a large income they probably spend a substantial amount of it. The book talks about how the majority of millionaires live in less costly areas and are not concerned about the lifestyle they live, often living far below their means even though they are wealthy. The book categorizes people as Prodigious Accumulators of Wealth (PAWs) and Under Accumulators of Wealth (UAWs) and attempts to separate the idea of having high income and being wealthy. Check this book out if you’re looking to gain a better understanding of building long-lasting wealth.

These 3 books are a great place to start. It is only the beginning and these books are only a taste of what the personal finance sector has to offer. For other resources check out our Instagram account where we post resources weekly.

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Can I Afford It?

There is a big difference between having the money to buy something and being able to afford it. In most cases just because we have the funds to be able to purchase something it doesn’t mean we should buy it. When we are young our pay cheque enters our account and leaves just as quickly. We think we can buy items because the money is available through the tap of a card. The majority of the everyday millionaires live well below their means and refrain from buying luxury items. Everyday millionaires are often able to afford luxury items but don’t because their foundational values are frugality, saving and investing to build wealth.

There are a few questions we have to ask ourselves before understanding whether or not we can afford an item. First, am I sacrificing any amount of money from my other financial goals to be able to purchase this item? Unless the item is a need or of other significant importance it can be added to our financial plan and saved towards before purchasing.

Secondly, is this item a depreciating asset/what is the value of this item to me? The first question is fairly straight forward but the second question can be a bit difficult to answer. There are a number of factors to look at when addressing the second question. What type of item are you purchasing? Is it a nondurable/perishable good or a durable good? Many times if the item we want to purchase is a perishable good like fast food or a meal at a restaurant the price is not justified by the product/service. As a consumer we have to understand the total product concept that we are buying into. When we purchase a meal at a restaurant we are buying more than just the meal itself. You are also buying into the excitement leading up to the meal, the atmosphere, service during the meal and often the ability to be able to connect with a group of people. We still have the question whether the total product justifies the price of the experience. This can be determined on a case-by-case basis.

If the item is a durable good we can examine the cost over a period of time. The more we use an item the more spread out the initial cost of the purchase is. A pair of jeans that we spent $100 on and wear everyday has cost us $0.27 a day for the first year and it goes down from there. This looks pretty good in comparison to a pair of jeans we pay $100 for and wear a couple times a year. Let’s say we wear this second pair of jeans on 5 separate occasions throughout the year, we have spent $20 a day to wear those jeans. Not good. That is not to mention the clothing that we have purchased but not worn. This means we have spent our hard earned money to be able to hold a piece of clothing in our possession without using it. The ROI isn’t looking to good on that purchase. This example helps to illustrate the importance of the second question and the value we can draw out of an item for each dollar we spend on it.

Our ability to access funds makes it easier to spend more money. Part of the issue is credit cards and spending money that isn’t ours which I have spoken about previously (The Pros and Cons of Credit Cards). The other issue is that banks often over qualify us for loans. We get access to money but we can neither afford or have an understanding of the ramifications associated with it.  This has been known to cause moral dilemmas for employees at banks as they are asked to meet quotas on the amount of credit cards they sell and money they have to loan out. When we receive a student loan or get a credit the average person doesn’t fully understand how to properly use the funds we gain access to. We tend to spend the money and worry about it later which leads to us paying more fees or interest than necessary. It is important to fully understand the contractual agreement you are signing up for before entering the loanable funds market. Banks receive the majority of their income from the deposits of customers but they also receive a lot of their income from the fees we pay on overdraft charges, credit card fees and interest. Banks borrow short and lend long. The banks generate funds by accepting deposits on short notice and the banks lend funds over a long duration in order to be able to collect interest. Banks also have many depositors and loan money to few. This makes for a smoothly operating financial system where money stays in rotation. As much as we rely on banks they are a for profit business. As the banks customers we have to educate ourselves and take care of ourselves first.

By separating our ability to be able to purchase something from our ability to afford it we can make better everyday decisions. This will allow us to better stick to our financial goals and set us down the right path in our relationship with money.

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