Money management can be difficult for the best of us. That’s because many young people are not taught the basics about saving and spending when they are young. School boards are looking to change that by implementing more money management classes, like the one pilot program introduced in Ontario recently. However, until financial literacy messages are cemented, young Canadians are lost. This is especially true when it comes to investing.
A recent survey by the Ontario Securities Commission into investing habits of young people, found four in five millennials, those born after 1981 and before 1999, are saving. But only one in two are investing.
Here are some of the reasons the millennials surveyed in the OSC report gave for not investing their savings:
- One in seven have other financial priorities.
- 53 percent say debt is an obstacle to investing.
- One in six don’t understand it enough to get started.
- 57 percent are worried about losing money in the financial markets.
- 30 percent don’t trust big banks or investment firms with their money.
If you are someone who likes to save but is unsure about investing. Here is how to get started now.
In investing, the longer time you have to save, historically the more money you can earn. The magic of compound interest works best over a long period. 10, 15 20, even 25 years. Over a longer period, your investment is able to capture all the low – lows and high-highs and the trend is usually higher. The OSC report says, “Younger investors are, on average, better placed than anyone to wait through periodic financial downturns and take full advantage of the long-term gains that can come from investing.”
Decide what your time horizon is to calculate how much risk you can take when investing. Generally speaking the longer your time horizon, the more risk (or more stocks) you can buy, the shorter the safer (or more fixed income) products you have to buy.
Your time horizon should dictate how much risk you should take, but not all of us are willing to take risks just because our age says we can. Risk tolerance is one of the most important components to investing. If you buy volatile stocks you are not comfortable with, you are likely to not hold on to them for the long term. You could also experience sleepless night on the days the market is down, thinking about your portfolio. On the other hand, if you can manage the risk you might find fixed income products boring and not showing you the kinds of return you were hoping.
Measuring risk tolerance
There are number of risk tolerance calculators online you can refer to. However, you can also ask yourself some key questions. Such as:
- Do you understand the market and how it works?
- Are you keeping this money invested for the long term?
- Do you have other investments?
- Have you ever experienced a big market correction?
The more you answer Yes, the more likely it is you can manage risk.
Where to invest
When it comes to finding a vehicle to invest your money in, you are spoiled for choice. There are regular investment accounts, but to be more tax efficient you can invest your money inside a Registered Retirement Savings Plans (RRSP) or Tax-Free Savings Accounts (TFSA.)
Most Canadians are familiar with RRSPs as they have been around since 1957. Less familiar is the TFSA that only came into existence in 2009. The main difference is the RRSP gives you immediate tax relief in the year you claim that contribution. You pay tax when you withdraw the money. Whereas in the TFSA your money is invested after taxes and the money can be withdrawn tax-free. For RRSPs you get a boost from the fact that you get immediate tax savings (in the form of a deduction from your taxable income for the year in which they’re purchased).
The tax-savings with TFSAs is that any money you earn on investments is non-taxable. While the upfront income tax savings from RRSPs may seem enticing, the fact is that if you are early in your career, and therefore making a relatively low income, you are better off investing in TFSAs.
The OCS report says young people are doing a lot right; they are saving, paying down debt and looking towards their financial future. However, they add, many who can capitalize by investing early in life and take advantage of the significant gains that can come with long-term investing, are not doing so. Their survey shows, many young people are not taking advantage of this opportunity.
When you first start investing doing your research is important, but consulting with a financial advisor before you make a trade would be a smart move. DIY investing is a big money saver, but inexperienced investing can also cost you a lot of money.