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Credit Scores, Credit Reports, Credit…

Your Credit Score is so, so, so important. The fact that we are not taught about it in high school is kind of absurd. Your credit score is a three digit number that shows how well you manage your credit and lenders use this number to determine whether or not they will lend you money. There are many purchases in life that you will either require a loan or begin to think about a loan as a way of funding the expense. Use credit well and your score goes up but use it badly and it goes down.

The benefits associated with having good credit aren’t talked about enough either, having good credit allows you to negotiate lower interest rates which can save you tens of thousands of dollars. There are a number of factors that affect your credit score, a few of them are: how long you’ve had credit, if you carry a balance on your credit cards, if you miss payments, the type of credit you’re using and many more.

It can take a while before your credit score improves also but I will talk about some ways that it can be done. Monitor your payment history and score. If you come across a transaction that wasn’t yours make sure to report it as soon as possible to avoid any of the ramifications. You should also actively monitor your payment history to insure payments are done on time, pay the full amount if possible or the minimum if not and contact the lender if you foresee trouble paying your balance. Use your credit wisely, it is typically advised that you keep your credit utilization ratio below 30% and to never go above your credit limit. Consistency in this area will result in the gradual increase of your credit score. Limit the number of credit checks and increase the length of your credit history. It is a hard hit on your credit score when you close a credit card or default on a loan. If you have a credit card it is better to keep the account open and use it every so often. It is also important to avoid getting to many credit checks either through work or by getting a number of credit cards because every check counts as a hard hit against your credit score.

There are a number of institutions that can access your credit score and based on your jurisdiction they may or may not require your consent. Some of the institutions include: Banks, credit unions, credit card companies, employers, and even mobile phone companies. These institutions use your credit score to determine whether you are suitable for a job, whether or not they will lend you money, amongst other things. It is kind of crazy to think you can get denied a job based on your credit score and some people don’t even know they have a credit score.

It is super important than when you go into any kind of debt not only do you pay it off as fast as you can because you don’t know what type of financial hardship may be lurking around the corner. But also to never miss a payment, if you anticipate that you will be missing a payment it is important that you contact your lender and negotiate the terms of your payment. They can often work with you to help reduce or in some cases even waive your payment. If you miss a payment it can significantly affect your credit score and make it that much more difficult to borrow money in the future. Other factors that can affect your credit score are: if your debts have been sent to a collection agency, any record of insolvency or bankruptcy, the amount of outstanding debts.

For more personal finance information make sure to check out Instagram @therichcollegestudent. If you have any suggestions for topics make sure to leave them in the comments and leave a like if you enjoyed reading.

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Habits of a Good Investor

Developing good habits takes time but they are an important part of investing. Due to how long it can take it is important that you start early and remain consistent. When it comes to investing we are talking about the funds you eventually hope to retire with so it is even more essential to remain on track. With great habits it isn’t uncommon for people to retire earlier than expected.

The first thing any investor should do is begin with their goals. A goal is the object of a person’s ambition or effort; an aim or desired result. By developing a goal with your money your investments can be structured around your goals. There are different types of investments that are more suited to different goals and their timeline. If your goal is to preserve income you will be investing in different products compared to someone investing for their first house. Investing is definitely not a one size fits all activity and a lot of time and effort has to be done before beginning and during investing.

Secondly all investors should regularly invest and review their goals. Especially at a young age when compound interest is on your side. Develop the habit of investing a regular amount that you can afford allowing you to take the emotions out of your investments. Knowing that a certain amount of money is coming out of your account every month or pay cheque makes it so you can adjust and budget for that decrease in your income and better prepare to live off of a smaller amount of money given that it is affordable, by investing in good products your money can increase substantially with very little initial investment. Regularly adjusting and checking in on your goals is also essential because things can change very quickly, your income may adjust to allow for greater investment which then allows you to reach your goal quicker or maybe the ROI that you had originally thought you were going to achieve is much higher now. Whatever the case checking in on your goals allows you to stay on track and be aware of everything going on with your money. Regardless if someone else is managing your money it is important to stay on top of things.

Thirdly, diversification is a key factor in any successful portfolio. Selecting investments that fit you specifically as well as being in multiple different asset classes allows you to have a well balanced portfolio that avoids large dips in value during a market correction. Those who were well diversified and stuck to their investment strategy not only were able to pick up undervalued stocks but also saw very large returns during the pandemic. Diversification is probably the most important part of any investment portfolio and it’s a very underrated part of investing. If all of your investments are in one sector you may enjoy the ride while that sector is successful such as financial services post pandemic but quickly that can change. A rule of thumb is that if your entire portfolio is in the green than you are probably not diversified enough.

Finally, emotionless investing. We have previously spoken about taking emotion out of investing but I will provide a quick summary of what we have previously spoken about. By letting your emotions rule and selling when your portfolio is down and buying stock when it is performing well you are playing a dangerous game that will only result in the loss of money in the long run. The most stress free and proven strategy is value investing. Buy solid funds/stocks and hold them for a long time. Weather the ups and downs of the stock market and you are sure to see an increase in capital.

For more personal finance information make sure to check out Instagram @therichcollegestudent. If you have any suggestions for topics make sure to leave them in the comments and leave a like if you enjoyed reading.

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Bonds

This week I decided to write about bonds due to how common the term may be in investing conversations. Whether in a discussion with your financial advisor or at the dinner table you have probably heard of a bond. Similar to stocks or mutual fund a bond is another form of investment that can be held within your investment accounts. The formal definition of a bond is a fixed income instrument that represents a loan made by an investor to a borrower.  They can be either government or corporate in nature and typically do not provide a high yield. Bonds can help to diversify many portfolios. They tend to move in different directions than stocks although they can be negatively affected just like stocks can but typically face less volatility providing more security to your investments. With the security on investments comes the lack of ability to significantly increase your money. Similar to stocks also it is important to invest in bonds in different asset classes in order to further diversify your portfolio.

Understanding how bonds work can be difficult to understand. A very simplified explanation is that when a company needs funds they may issue bonds to investors. These investors are given the terms of their agreement and are given interest payments for their money. At the provided maturity date the bond can be redeemed.

There are many different factors that affect bond prices. One of the many conversations you may have heard bonds come up in are discussion centered around interest rates. Interest rates affect the value and income that can be achieved through bonds. Bonds move in the opposite direction to interest rates. If interest rates go up, bond prices go down. The change is usually not one to one either. In the current climate with interest rates as low as they can possibly be a 1% increase in interest rates could have as large as a 7% decrease in bond values. A second factor is credit quality. Credit quality directly affects bonds, bonds with lower credit quality tend to be more volatile but provide higher interest rates. Liquidity is the final factor that we will be discussing. The liquidity of a bond is defined by how easily it can be sold, lower credit quality bonds have less liquidity which can only negatively affect the price of the bond.

Gaining an understanding of all types of investments is essential especially because the market is ever changing. Due to peoples risk tolerance becoming significantly more conservative during and after the pandemic the shift has been away from futures and more towards investments that provide a more guaranteed return. Bonds and GICs have become more popular especially with people owning substantial assets due to their lack of volatility and security. Although not yielding a significant amount the security that comes with knowing how much money you have at all times can often be worth a fortune.

For more personal finance information make sure to check out Instagram @therichcollegestudent. If you have any suggestions for topics make sure to leave them in the comments and leave a like if you enjoyed reading.

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Why Invest?

Putting away lump sums of money every year or having payments come out of your account every month can seem pointless at times especially when you want to be spending that money. It can be difficult to stay motivated and on track with your goals when you see your friends and family living extravagant lifestyles. This can be especially difficult in the age of social media as we are constantly faced with seeing people on vacations or out with friends. The questions that faces us is why should we invest? We work so hard for the money, don’t we deserve to spend it? There are many reasons to invest. I will only be listing some of the more general reasons.

  1. Tax advantages
  2. Saving for Retirement
  3. Intragenerational Transfer

Tax Advantages

Depending on the location of your money it is possible to receive tax benefits from your investments. An example of this is that if you do not already receive a tax return opening a RRSP can allow you to be more efficient with your taxes and potentially enable you to receive a tax return. By putting money in your RRSP you reduce the amount of taxable income you have for the year which can only benefit you. When an account is registered you typically pay a fee to own it but you receive benefits from the account. One of these advantages can be utilized through a TFSA. Any interest, dividends, and capital gains are tax free for life. When you get into retirement tax free money is the best kind of money. For this reason it is important to maximize your TFSA, make sure to check out one of our previous blogs for more on investment accounts (Investment Accounts). In most cases people will empty their TFSAs first in retirement so they don’t have to pay taxes. All other accounts have tax withholdings once money is withdrawn.

Saving for Retirement

Investing is the most reliable way to retire comfortably. It may seem like something in the distant future but the greater your time horizon the better for you. Having compound interest on your side can allow you to build up more wealth than you know what to do with. Investing allows your money to work for you and take away some of the stress of saving enough funds to be able to retire. You want to be able to make the decision about when you want to retire and not be forced to work in the ladder stages of your life. Another advantage is that you can develop an income from your investments through dividends. This supplementary income is most often reinvested but especially when you are comfortable with your retirement fund and are financial secure this extra money can be used to subsidize some of the activities you enjoy.

Intragenerational Transfer

Through investing it is possible to leave a larger amount of money for your children and grandchildren. There are investments that pass probate and leave more money in the hands of your family. Many investors want to keep the money in the hands of the family and leaving everything to your estate results in a significant loss of your wealth. Luckily there are many products that you can transition to in the late stages of your life to be able to pass more money directly to your family. One of those products are segregated funds, an insurance investment, due to it being an insurance product this money passes probate and a guaranteed percentage of it goes directly to your family. It is important to utilize these products to make sure the money you have worked hard for remains in the pockets of the people you love.

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Investing in Yourself

Investing in yourself is one of the investments less spoken about. When we speak about investing we typically talk about financial goals in the distant future or putting away money to live a certain lifestyle in retirement. Investing in yourself without any financial input can be done by investing your time, hard work, or other non-monetary assets you have. Simply taking a few extra hours a week to learn a new skill can become a valuable investment down the line.  Investing in yourself is typically on a shorter scale, these goals are set for 1-3, 5-7, or 10 years. These investments in yourself will help you to achieve your goals 10+ years down the line and improve yourself during the journey. Investing in yourself allows you to create a better foundation for you to be able to help others, advance your career, and become a better version of yourself.

There are many ways a person can invest in themselves, what I recommend is developing end goals and mean goals. An end goal is something that brings you fulfillment. While a mean goal is the steps you take today to be able to achieve that end goal. An example of an end goal would be that I want to develop a better reputation for myself at work. Mean goals can be developed in order to achieve this such as showing up early to work or taking on extra projects. After achieving this end goal your actions could lead to a promotion or a raise resulting in career advancement and building a better foundation for yourself to be able to help others and achieve your long-term goals.

The issue with mean and end goals is that similar to financial investment in many cases it takes consistency and commitment to be able to gain the benefits from your investment. While taking on extra projects may get you a pat on the back it is not till you do an outstanding job on a consistent basis that you will get recognized. This commitment can be very difficult for many people and may result in them getting discouraged if they do not get the recognition they are seeking. It is important that once you have set a goal that you stick with it and understand through your hard work you will get what you deserve and even if that doesn’t come in monetary recognition you are sure to gain experience and learn things that will be beneficial to you, your career, and your goals.

Investing in yourself doesn’t always have to be about moving forward either. It can be just as important to preserve and maintain the progress you have already made. It can be important to take a pause and evaluate where you currently are mentally, physically, emotionally and more in order to make sure you are able to perform at 100% when you need to. There is no point in building on an old broken foundation, it will only result in the collapse of all your hard work. Instead, take a step back solidify the assets you have and then begin to improve yourself taking small steps along the way.

For more personal finance advice make sure to check out our Instagram @therichcollegestudent. If you enjoyed this week’s blog make sure to like and leave a comment if you think there are any ways I can improve. You can also subscribe if you would like weekly content directly in your mailbox.

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Financial Mistakes in University

It was surprising for me to find out that I haven’t written a blog directed at the mistakes college students make given the title of my blog, but here we are. There are a number of personal finance mistakes that students make in college that can set them up for a poor start to their accumulation years of work after university.

Failing to Make a Budget

Before your school year begins you should sit down and create a budget for monthly and yearly expenses. Creating a budget will decrease the odds of money running out before the end of the year. You will probably have little income and this may lead to you wasting your money on things you don’t need. Start by making a simple budget as you probably have few financial responsibilities. You can get a better idea of where you money is going and build good habits for after graduating when a budget is essential. This will decrease the amount of stress you have during the school year and allow you to allocate more of your time towards studying.

Borrowing More Than you Need

We have previously talked about how banks will qualify you for more than you can afford and the same thing happens through provincial and government loans. You will often get qualified for far more than you need. The cost of higher education has resulted in parents not being able to provide a significant amount of financial support and students are forced to rely on students loans to pay for education. If you are a student try to restrain from using your student loan money for expenses other than necessary living expenses.  It is important that when you accept this money if necessary that you only spend the amount that you need and use the rest to pay off your loan in order to suffer as little interest as possible. Your future self will thank you for accumulating as little debt as possible.

Attending an Unaffordable University

A mistake that is very common is attending a university that is unaffordable for the student. The school may be unaffordable for many reasons including being away from home and attending a prestigious university. In many cases the school you attend is not important, I always say that you never ask your doctor where they got their degree all you care about is that they are qualified. It can be beneficial to do your first to years of university at a local school and then transferring to a more prestigious school in the upper years if necessary. Always consider the return on investment by attending a different more expensive school. Students may also lose a significant amount of money by attending university when they are unsure of the career path they want to pursue.

Not Applying for Scholarships, Grants and Bursaries

There are many scholarships, grants and bursaries that go unclaimed each year. By applying to these financial aids a student can save a significant amount of money. Financial aid can take that significant burden off of families attempting to pay for their child’s education. This can leave room for the students to live more comfortably in university and allocate money towards other necessities and leisure. This can save students from entering their professional careers with a lot of debt.

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Is Buying a Home a Good or Bad Investment?

In today’s society it seems like everyone is trying to complete a checklist of goals. Along with completing University and getting married one of the main items they want to check off that list is buying a home. The reality is buying a home may not be the correct decision for everyone at this time. I am an advocate for purchasing real estate it is not a financial decision that should be taken lightly or rushed into.

The average house does appreciate at a greater rate than inflation but just because there is potential for an asset to appreciate that does not qualify it as a good investment. Throughout this blog I will be discussing a home as your main shelter and not as a secondary property. Unlike stocks or other monetary investments a home provides shelter and for that reason you cannot capitalize on market highs or cut your losses at a market downturn. To a certain degree you are tied to your investment and the collapse of the market in 2008 has shown that people are not under control of their investment as they were forced to sell their house/default on their investment at an inopportune time.

The operating or carrying cost of a home is very high. This is similar to the expenses or commissions tied with investments which has the industry trending towards self-directed investment accounts. In the majority of investments it does not require the investor to consistently input cash. There are many expenses that are associated with a house that are not included in the overall evaluation of the home. From real estate taxes, insurance, utilities to repairs, maintenance, renovations. Not to mention the expense associated with major repairs such as siding, roof, fence, windows. Many of these expenses which are not carried by the renter in an apartment. The main argument against renting is that you are throwing your money away but renting provides you greater flexibility with less of the responsibility of repairs. At the end of the day your house may appreciate by $100,000 and although it may be nice to have an extra $100,000 in your hand you have not accounted for the fact that inflation has risen, commission fees on realtors and cost of living in the home for that time frame.

Given that your home is your primary residence your house will not generate any cash flow similar to what a dividend would do. Renting a portion of your home can help cover some of the cost of your mortgage and insurance. It can be a great source of cash flow for the home owner but being a rental property owner is a very difficult task. Some of the struggles associated with renting include finding a suitable renter, preparing the unit, maintenance issues, changing the rental price.   An investment property can be a great source of income but also carries all of the same struggles as renting out of your own home and more.

I have discussed many of the reasons why a home is a poor investment but there are many reasons why a home is said to be a good investment. One of the reasons is that the housing market is not too volatile. Although the market has faced its ups and downs the market is shown to be more consistent than the stock market. As your mortgage is paid down there is a significant amount of equity that can be gained from a home. Long term it does appreciate and especially if purchasing a home other than your primary residence it can be a good long term investment that helps to diversify your portfolio.

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Investing Mistakes

There are quite a few mistakes that investors can make when beginning their investing career. In this weeks blog I will be discussing 4 of the major mistakes that I have witnessed occur to others and some that I have also fallen victim to. It is important to keep in mind that nobodies financial journey is perfect and we all make mistakes along the way but if you can avoid them you are just one step ahead of everyone else. Keeping these mistakes in mind will help you have a fruitful investing journey.

Mistakes

  1. Not Understanding the Investment
  2. Lack of Patience and Letting your Emotions Rule
  3. Timing the Market
  4. Failing to Diversify

Not Understanding the Investment  

One of the biggest mistakes an investor can make is not understanding the company they are investing into. Previously we have talked about the importance of understanding the underlying holdings of ETFs but it is just as important to understand the companies you are investing into. You may not be fully aware of the complexities of the business but you should have a general idea of what they do and how their business model operates. Warren Buffet has warned against investing in companies whose business models you do not understand. While it is important to avoid bias towards companies who we favor due to what they produce, it is important to understand the fundamentals. A valuable skill any investor can learn is the ability to read a balance sheet and understand the behind the scenes business operations of the company they are investing into. The amount of debt, liquid assets, and many other factors can say a lot about a company.

Lack of Patience and Letting your Emotions Rule

These two go hand in hand. Value investing is the best way to sustainably and significantly grow your money. It is important to understand that as a value investor you are in it for the long game. By not having patience, selling in market corrections, and buying at peaks you can quickly dwindle down your money. It is important to understand that in a bear market it is only a loss if you lock it in at a loss. As long as your money is in high quality investments there is no need to worry when the value of a stock goes down because the market has proven that it will return again. Understand that whether you are happy or sad our emotions can cause us to make poor decisions. One method people use to remove their emotions from investing is Dollar Cost Averaging which we spoke about last week (What is Dollar Cost Averaging?). This method allows you to systematically put an amount of money into the market at whatever intervals of time you desire to take advantage of market volatility. Whether the market is up or down you invest, resulting in a lower average cost per stock. Whatever method you choose for investing remember that your emotions should have no role in it.

Timing the Market

You may of heard about people attempting to time the market. A popular term floating around is “buying the dip” or options trading would be another way people attempt to time the market. When the market is low it is a time for investors to potentially add more assets into the market but if you are attempting to gain a profit off of every small correction in the market you are bound to lose money. The goal for value investing, the type of investing I recommend to everyone is to hold quality investments for a long period of time. Picking the time to invest in the market is not as important as investing as early as possible. On average the market returns 10% annually which means the earlier you invest the earlier you will have compound interest working for you. Picking a time to enter the market will only result in an inconsistent way of making/losing your money. Timing the market also leads to emotional investing and attempting to get your money back from a loss similar to gambling. Patience and consistency in the market will lead to great results.

Failing to Diversify

Diversification is an extremely important role of investing and by not diversifying you are not taking advantage of everything the market has to offer. Individual stocks tend to go up in value when their sector goes up. The only difference is the degree of which that stock increases.  It is impossible as investors to know what sector will go up. By investing in each sector we can take advantage of sector increases. Failure to diversify creates unnecessary risk. In this case it doesn’t matter your level of risk tolerance you should balance the type of investments you have in each sector of the market. In this way you are not hit as heavily when a sector is down.

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What is Dollar Cost Averaging?

Dollar cost averaging involves investing a dollar amount on a regular basis no matter the state of the market. DCA allows the investor to separate investing from their emotions. Investors can avoid their psychological bias and stay away from the fear and greed that comes with investing.

In this method a long term investor can take advantage of a bear market and see it as an advantage to buy more shares. DCA helps the investor by allowing the investor to purchase a greater amount of shares when there is a correction in the market and a smaller amount of shares when the market is high.

The approach is consistent and can help the investor meet their long term financial goals.  This method typically results in a lower average cost compared to a lump sum purchase of shares.  Lump sum investing is when an investor puts all of their money available at one time. Lump sum investing can result in higher returns if invested at the right time within the market. History favors lump sum investing in terms of profit two thirds of the time. DCA on the other hand has proven superior in avoiding losses. Due to these reasons a person should have a good understanding of their risk tolerance before choosing a method of investment. Find out more about risk tolerance on our Instagram @therichcollegestudent. DCA is not appropriate for everyone but it is appropriate for those who want to invest in individual stocks and wish or need to invest regularly over time. It can help the investor avoid mistiming the market and investing all of their money at a market high.