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Investing 101

The best time for you to invest is yesterday but the second best time for you to invest is today. If you are 20 it would have been better to get into investing at 18. 20 is still a lot better than 25. 25 is a lot better than 30. By investing today you’ll have the effects of compound interest on your side. Compound interest is the interest you earn on interest (confusing right). Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” 

Investing can be a scary world to go into. One quick search on youtube and you’ll hear all types of terms such as dividends, ROI, P/E, bear, bull, the list goes on. Trying to figure this all out will have you pulling out your hair and screaming.

“WHAT DOES IT ALL MEAN?”

One thing we have to get out of the way is investing doesn’t have to be about picking out stocks. You don’t have to pick the next amazon to have your money work for you. Let’s go through the process step by step. 

  • Opening a brokerage account
  • Making your first purchase
  • Checking in

Opening  a Brokerage Account

A brokerage account is a fancy way of saying an account for buying and selling a variety of investments. You can usually open these through your bank or an independent online broker. If you’re wanting to stick with a bank I would go with Scotia Itrade or TD Ameritrade.

Scotia Itrade

Pros

  • No fees for purchasing mutual funds.
  • Fees for equities and Options can go as low as $4.99 for active traders (at least 150 trades per quarter).
  • Ability to create practice accounts to learn how to invest risk-free.
  • Access to comprehensive market analytics. 
  • Special offers for newcomers to Canada (up to 10 free trades) and young investors (up to $200 in annual reimbursements on administration fees).
  • No minimum investment.
  • Special incentives for those who already bank with Scotia (Ultimate Package holders receive 10-5 free trades per year; approximately worth up to $100 in value).
  • Get access to Scotiabank’s in-depth research capabilities

The Cons

  • There is a low activity fee of $25 charged per quarter.
  • Annual account fees start from $25 (for RESPs) to $100 (for RRSPs, RRIFs, LIRAs, and LIFs).ar, have at least $25,000 in investments, or are under the age of 26.
  • At a flat $9.99 fee on most trades (under 150 per quarter), there are cheaper options offered by alternative discount brokerages.

TD Ameritrade

Pros

  • Commission-free stock, ETF and options trades.
  • Free research.
  • High-quality trading platforms.
  • No account minimum.
  • Good customer support.
  • Large investment selection.

Cons

  • No fractional shares

If you want to go with an independent online broker I would recommend Wealthsimple or Questrade. 

Questrade

Pros

  • No annual or quarterly administrative account fees.
  • No fees for buying ETFs.
  • Low trading fees: $0.01 per share (minimum of $4.95 up to a maximum of $9.95 per trade for most investment types).
  • Huge range of investment options including: ETFs, stocks, mutual funds, IPOs, bonds, GICs, Options, forex and CFDs, precious metals, and more.
  • Great online and mobile app experience. 
  • No inactivity fee.
  • Option to upgrade to Enhanced and Advanced accounts that offer more sophisticated investment tools for active day traders and seasoned investors.
  • Easy sign-up process and up to $150 in rebates for transfer fees when switching to Questrade.

Cons

  • Minimum investment amount of $1,000.
  • Unlike most other brokerages, there are fees for buying mutual funds.

Wealthsimple

Pros

  • New account holders can get a $25 cash bonus.
  • No commissions on trades is an absolute game changer.
  • Sleek and easy-to-use mobile experience.
  • No accounts minimums, annual administrative fee, or withdrawal fees.
  • RRSP and TFSA account options available.
  • New features coming down the pipeline including notifications when stock prices move and news on which stock to follow.

Cons

  • Can only trade ETFs and stocks. 
  • Can’t avoid the 1.5% foreign exchange fee by leveraging Norbert’s Gambit when trading U.S. stocks.
  • Exclusively available as a mobile app.
  • Lack of any tools, investment analytics, or educational content.
  • New deposits can take up to 3 days to process.

I personally trade with Questrade for their low trading fees and zero administration fees. I have also found their platform to be easily manoeuvrable and understandable. Opening any of the brokerage accounts listed above is a good place to start and you can compare them to choose to one that best suites you..

Once you have decided who you are signing up with you’ll open a Tax Free Savings Account (TFSA). This account will allow you to set money aside to invest tax free. You can invest and watch your money grow, collect dividends and reinvest all without having to pay tax! This account had an annual contribution limit of $6000 in 2020. If you do not utilize that amount in any given year it rolls over to the following year. If you go over that amount you are taxed on the amount of money over your limit. 

Making Your First Purchase

When I said you didn’t have to pick stocks to have your money work for you I meant it. The stock market returns an average of 10% a year. By investing in the S&P 500 or NASDAQ (the two major stock markets in the US) through index funds or ETFS’s  you can double your money approximately every 7 years. 

If you have complicated finances I would recommend an investment advisor but they aren’t always necessary. In reality many investment advisors can’t beat the market or pick stocks any better than you can if you are informed. CNBC reported in 2019 that the majority of active traders trailed the S&P 500 for the 9th year in a row. 

Investment advisors also take a portion of your profits for doing worse than you could have usually around 1%. The difference is that 10% is significantly greater than 9% in the long run. A 10% return on $100,000 is $10,000 while a 9% return is $9000. It only gets worse as the amounts get larger and compound interest starts to exponentially grow your money. 

Investing in diversified index portfolios such as:

  • Vanguard Total Stock Market Index Fund (VTSMX)
  • Vanguard Total International Stock Index Fund (VGTSX)
  • Vanguard Total Bond Market Fund (VBMFX)

You will have a great start in your investing career. By investing $1,200 this year ($100/month) in 10 years you would have $3,248 for doing nothing except letting it grow!

Now lets scale it up. 

$12,000 dollars this year at a 10% return. In 25 years you’ll have. $144,683.33

Checking in

After making your initial investment it is important to let the money sit and accumulate over time with monthly additions. It doesnt matter if you add $50 a month or $200 it is about building that habit of continually adding to your investments. 

Refrain from checking your account every day, there will be days your portfolio drops 1%,5%,10% and there will be days you go up the same amount. Stick through the hills and valleys and everything will be fine. 

In a later blog we will talk about how you can adjust your portfolio in order to have it properly diversified to decrease risk. 

The information I provide in my blog is only my opinion and I encourage you to do your own research before beginning to invest. 

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The Pros and Cons of Credit Cards

Credit cards can either be a good decision or the WORST decision you have ever made in your life. If you were to search “Things to do when you turn 18” credit cards rank highly amongst the top 10 but the dangers and benefits of a credit card are severely overlooked. They can have you wishing you never got a credit card in the first place. 

Most people are expecting to go into debt in order to fund a large purchase such as a car or home at some point in their life. For this reason, a credit card can be beneficial in order to build your credit score. 

On the other hand, if you are already bad with controlling your spending you should stay clear of credit cards as they will drag you into years and years of debt. 

  • What are credit cards?
  • Should I get one?
  • Why you shouldn’t get one

What are credit cards?

A credit card is a card issued from a bank that allows you to make purchases on credit. Credit cards differ from debit cards because you are using borrowed money (money that is not yours) that you are required to repay. 

CREDIT CARDS ARE NOT MONEY.

There are a number of different cards that you are able to apply for but the main ones issued to students are cashback cards and reward cards. These cards will likely have zero annual fees and be a good starting point for the majority of people. 

Cashback cards will pay you back a percentage of what you spend on eligible purchases. This amount is usually around 1%.

Reward cars will give you points on eligible purchases that you can utilize at a later date. 

There may also be options for travel rewards cards and other high percentage cashback cards that come at an annual fee. It is likely that the rewards that you will receive will not be greater than the annual fee given your expenditure at this point in your life although it is definitely something to consider on a case by case basis. A $500 credit limit, $0 annual fee card with definitely get the job done.

It is important to go in knowing what you want because banks are constantly willing to issue more credit to you than you can afford. Credit card fees are a major source of a bank’s income so they are always looking to capitalize on the ill-informed. 

It should become a part of your routine to pay off your credit card every two weeks and not carry a balance over a month. Doing this will make sure you do not incur any interest charges on the money you owe. 

Should I get one?

Unless you have a significant amount of wealth you will be applying for a mortgage or car loan at some point in your life. Developing a good credit score is essential for reducing the amount of interest you have to pay on the money you borrow and save you thousands of dollars. A credit card is a great way of building your credit score. I will be using the TransUnion credit score in my discussion. 

Your credit can range anywhere from 300 to 850.

Your credit score is broken down into a few categories: Utilization, payment history, balances, depth of credit, new credit, and available credit. We can go more in-depth on these in a later blog. 

Your credit card should replace your debit card for small everyday purchases in order to capitalize on the benefits of the card. As long as you can pay off your card and not carry a balance you can build your credit score and avoid fees. The benefits are pretty good as you increase your chance of qualifying for lower percentage loans and saving you tons of money in the future. 

But, there are two sides to every story. 

Why you shouldn’t get one

If you already have trouble spending money a credit card can ruin your credit score and put you into virtually irreversible debt. The credit that becomes available for you from credit cards will act as a catalyst for your financial actions. If you were already good with money you’ll be fine, if you are bad with money you’ll only be worse off. 

If you carry a balance on your credit card you will be paying around 20% extra on the money you owe. If you carry $100 to the next month you now owe $120. I think you can see how bad this can get on a larger scale. Along the way, you will also be ruining your credit score and borrowing money will cost you more in the future. 

If you don’t have the money in your debit account do not spend the money on your credit card. You won’t be able to pay it off and you will hate yourself in the future. A rule of thumb is if you cant buy 10 of them you can’t afford to buy one of them. 

People also justify their purchases all the time by saying I get 1% back on my card. Do not get stuck in the trap of spending to get money back. If you don’t buy a $100 item you didn’t lose out on 1% you saved 100%. As humans we are very good at convincing ourselves that we need to purchase something, avoid this urge as much as possible. I would recommend reading my previous blogs on saving and budgeting for more about allocating your money and using your money wisely. 

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Telling Your Money Where to Go

Budgeting makes it possible for you the have enough money to do things you want. By preparing a proper budget you can set money aside for every paycheque for your big-ticket purchases. As college students we have a lot to worry about from maintaining our grades to applying to different programs, budgeting is not one of our priorities. I want to provide some solutions that don’t require much maintenance and will take some of the stress away from managing your money. You will be able to keep track of where every dollar is going and streamline it towards where you want. 

The first step everyone should take is to review your last month’s bank statement (If you’re feeling especially inspired you can do this for the whole year). Find the items where you spend the majority of your money and identify any areas that are especially of concern. As a society, we have a very big problem that is summarized perfectly by Joshua Fields Millburn of “The Minimalists” (Brandon’s paraphrased version) “We make good money but we spend even better money.”

It is important to not only find areas where you enjoy allocating your money but also identifying areas where you can potentially cut back. My favorite quote on budgeting comes from Ramit Sethi “Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.” To be able to spend money on the things we want we also have to be able to make some sacrifices. 

Techniques

Once we have identified areas where we allocate our money we begin to budget for those expenses. The most important part of this process is self-discipline, as people, we are very good at convincing ourselves that we need something. In reality, we don’t.  There are a few techniques for this part. 

  • Envelope Method 
  • Incremental Budgeting 
  • Automation

Envelope Method

The Envelope method is probably the method the requires thAT most work. First, decide the categories that you will be spending your money on. Then decide the amount of money you are going to allocate to each category.  Once you have decided, place the physical amount of money into envelopes with the appropriate labels. Every time you go to buy clothes, groceries, gas take the envelope and only spend what is in it. 

When the money is done it’s done.

If you are to need more money you would relocate some of the money from one envelope to another. An example being you have used up your gas money for the month but you still need more gas. Take money from your clothing allowance and use it for gas. 

If you don’t care for the physical envelopes we will discuss a digital method later. 

Incremental Budgeting 

The incremental budgeting method (My favorite method) requires a bit of upfront work but is then pretty sustainable afterwords. It requires you to analyze your spending from the previous year and cut down your spending by a percentage. Through this method, you’ll quickly realize that we don’t need to spend nearly as much as we do. 

That money you save can be put towards your big-ticket goals are simply redistributed back into areas you enjoy. If buying shoes is your thing a portion of the 5-10% that you cut from your budget can be put back into buying shoes (given you’ve paid yourself first). 

We can also begin to plan for future expenses. if you are anticipating having to take out money for student loans you can put the money towards that. If you plan to get a car within the next 5 years let’s save up for it now. Putting in preventative measures to avoid debt will have your future self-loving the person you are now. 

Automation

The automation technique is less about budgeting and more about making your life easier. This technique can be implemented in the previous ways of budgeting. It entails setting up automatic transfers from your chequing account into various other accounts. In this way, we can reduce the risk of carrying around physical cash and reduce the urge to spend money. 

It is completely up to you once you have established your emergency fund how you want to set this up. If you are saving up for a big purchase down the line (5 or more years) you could tie your money up into index funds, mutual funds, or bonds (we will talk about these at a later date). If you need it in less than 5 years you can simply put your money into a savings account. This savings account shouldn’t be directly connected to your chequing account in any way to make it more difficult for you to transfer over a couple of dollars for a not-so-smart purchase. Instead, make it accessible but difficult to get the money. I personally do this by having my two accounts at two different banks, by doing this it requires 1-3 days for my money to be transferred from my savings to my chequing. 

Once you set up the groundwork for the transfers determine what money is going where and how much of it. The money left in your chequing account can be used for the fun items you’re going to purchase during the month, eating out, clothing, etc. 

Setting up a budget is a big step to financial stability that not many people take. By doing this you are already ahead of a lot of people. 

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Start Saving Today

Saving is the most difficult thing to do for a college student. We are constantly faced with peer pressure and societal expectations to spend money. We always have a fear of missing out (FOMO) and feel that we need to spend money in order to keep up with our friends or keep the people around us happy. It is extremely difficult for us to say “no” to coffee or dinner with a friend. Saving does not mean we can not enjoy certain things or have fun or can not go out. We can still do these activities as long as we set a budget and pay ourselves first. By implementing a few suggestions in this blog and future ones I will show you how you can save money while still doing all of your favourite things. 

  • Why Should I Save?
  • Planning for Expenses 
  • Being Guilt-Free 

Why Should I Save?

For most, saving feels useless without a purpose. While we can wait to win the lottery or gamble and become rich in an instant, the chances are very unlikely. Therefore, it is our responsibility to ensure we take the proper steps to become financially stable.

The reason most young people run through all their money every month is that saving feels useless. 

“The money is there, why can’t I spend it”

It can also be extremely tempting when you see the money in your account. That new shirt is only $40, that dinner will only cost me $15. Those numbers quickly add up and before you know it you are spending far too much. 

The key to a successful saving strategy/plan is to make it difficult for yourself to access that money. Here’s a good first step to achieve that, have a separate account, and second, develop an emergency fund. We could talk about what banks offer good accounts and what percentage of your income you should be putting away but just know that anything is better than nothing.  An emergency fund will help you be ready for job loss or an unexpected emergency. An emergency fund is not the same as your savings. This is for emergencies only. 

GOING ON A TRIP IS NOT AN EMERGENCY.  

Having an emergency fund will relieve some of the stress if your car breaks down because you don’t have to worry about finding money to pay for it to be fixed. You also don’t have to go into the D-word, debt. A rule of thumb for your emergency fund is 3 to 6 months of living expenses but $1,000 would be a good place to start. You should also consider potential expenses when creating your emergency fund. Will I have to fly home from university? Is my car in good working condition? Keeping these in mind will help tailor your emergency budget to your needs. Finally, make it difficult to be able to see and spend that money. 

It is important to have a purpose behind saving. Maybe you want to go on a trip, buy a car or make any sort of big purchase. As long as you have a goal you will be motivated to keep saving. Not spending $5 on a coffee won’t make you rich, but that $5 is $5 that you are taking away from your fund to go to Europe. That $20 you spend on clothing is $20 not going towards your next car. Having goals will make it that much more exciting when you reach those targets of $1,000, $5,000, and beyond. 

Planning for Expenses 

Planning for your future expenses can be one of the most beneficial things in your saving journey. You should review your bank statements (given you make most of your purchases on a debit or credit card) to identify your major expenses. There are two types of expenses; fixed expenses and variable expenses. 

Your fixed expenses are your recurring bills such as your cell phone bill, car payments, rent, etc. These are the easiest expenses to set aside money for. As long as you’re making enough money to cover your expenses these should be the easiest ones to plan for. 

Your fixed expenses can also include birthdays, weddings, or Christmas gifts. You know that every year you’ll have to buy gifts at Christmas, therefore, you should be setting money aside every month so when Christmas comes around you don’t overspend or have to find money to buy gifts. 

Variable expenses are the costs that can change depending on your expenditure per month such as groceries, or gas. These are difficult to budget for because they can change so frequently. We should try to make these expenses as predictable as possible and treat them as if they are fixed. We should take the average of our variable expenses for the year and factor that into your budget. 

You have to have self-control and when you have used up your money within the budget you are done for the month. When you spend less than your budget transfer the extra money to save for your big goals. 

Being Guilt-free 

Setting aside money for savings is just the first step in financial stability. In another blog, we will also talk about setting aside money for investing, paying off debt, etc. Saving is the all-important first step into managing your finances properly. 

Once you have set your money aside for saving, your expenses, and investing the money left in your bank account can be used for “guilt-free spending”. Whatever money is left over can be used to buy whatever you want. You have paid yourself first and now you are free to make your own decisions on where to allocate your money. 

If you want to buy a coffee every morning or buy that brand new shirt you want the price should have no effect on whether or not you make the purchase. I would even encourage you to make these ‘guilt-free’ purchases. After all, I do love to splurge on shoes from time to time. 

Saving with a purpose will help you achieve your financial goals, reduce stress and allow you to feel guilt-free when making your consumer purchases. 

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