Investing can be intimidating for young investors who are starting out. The wealth of information available online is a two-edged sword. You can learn just about anything you want, but with so much information available how do you tell the difference between good information and bad?
Related: Where Do You Get Your Financial Information?
And understanding investing can be complex enough. On top of that, there are many different investment styles and products to choose from.
This post will explore some of the basics that young investors need to understand in order to invest successfully.
Save Capital & Avoid Debt
Lack of funds is big issue for many young people. Many are forced to bridge the gap by borrowing from parents and taking out student loans or running up credit card debt.
Think long and hard about whether going into debt is a good idea. Some may champion the idea of taking out loans to pay for education, but be careful. Excessive student debt will seriously hamper your ability to save capital and take the steps needed to build wealth.
Once you have your debt under control, your next step is raising capital. Pay yourself every week by automatically funding your savings and retirement accounts – the rule of thumb is to put 10% away.
If you have a RRSP or equivalent plan, make sure you are funding it with every paycheque (note that with the TFSA and your saving ability, there may be other beneficial tax strategies). Take advantage of any company matching contributions if it’s present.
Save as much money as you can in your 20s and going into your 30s. That way you can build a substantial capital position and start to make larger investments as time goes on.
Education
Educate yourself on investment topics and learn as much as you can. Read books and expand your knowledge. Here is a list of investment and personal finance books that I have found useful.
- The Millionaire Teacher – Andrew Hallam
- The Lazy Investor – Derek Foster
- The Intelligent Investor – Benjamin Graham
- One Up On Wall Street – Peter Lynch
- How To Make Money In Stocks – William J. O’Neil
Virtual stock trading accounts and games can be a good way to test the waters and get your feet wet before committing any actual capital. However, be very conscious that once it’s your money, the psychology is different but it’s a good way to make mistakes early.
Open Accounts
Once you have your finances in order and you are ready to make your money work for you, open a discount broker account and setup all the accounts necessary.
Related: Questrade Tutorial – How To Use The Trading Platform
Don’t forget that saving money is going to be your best portfolio grower. See my dividend income reports for the past 4 years as an indication that my investing income is mostly fueled by my savings and some dividend increase.
- RRSP
- TFSA
- RESP
- Cash Account
Investing Strategies
Once you have your account opened and funded, you will need to decide on an investing strategy or combine more than one. There are many different styles to choose from or combine together.
There are many investing strategies that you can study first and read on.
- Dividend Investing (that’s my strategy)
- Index Investing
- Value Investing
- Momentum Trading
- Options Trading
There are also multiple type of investments such as
- Stocks
- REITs (A type of stock)
- Preferred Shares (Also a type of stock)
- Mutual Funds
- ETFs
- Bonds
You want to understand the tax advantages of your different accounts available along with the tax advantages on the investment types.
Keep Learning And Experimenting
Investing is a lifelong process. Keep learning as much as you can and experiment with different styles. Just be sure to never commit more than you can afford to lose.
Keep risky investments to a minimum, at least until you fully understand how they work. Start with small positions and gradually work your way up as you gain knowledge.
About the Author: Eric @ The Passive Income Earner is a DIY investor and software engineer by trade. He has a passion for building a retirement portfolio to retire from the income it generates. Subscribe to my newsletter for more unique content on investing.
Buying a home, especially for the first time, is an exciting venture, but once you’ve been pre-approved for a mortgage amount and found the perfect property you’ll need to make a decision on the right mortgage for you.
When my parents bought their first home here, after immigrating to Canada in the mid 1960’s, their choices were very limited – a down payment of a minimum of 25% and a 6% interest rate for a full 25 years. They had a mortgage payment of $101 a month and no prepayment options.
Related: How Much House Can You Afford?
Mortgages are no longer one size fits all. Many people become too fixated on the lowest interest rate, but there are numerous other choices they need to make to tailor a mortgage to best suit their needs and fit their lifestyle.
Conventional vs. high ratio Mortgage
A conventional mortgage requires a down payment of at least 20 per cent.
If you have a down payment of less than 20% of the purchase price, you’ll have a high-ratio mortgage, which must be insured. The minimum down payment you’re required to make is five per cent.
Mortgage loan insurance, usually from CMHC, protects the mortgage lender in case you aren’t able to make your payments.
Related: Why Mortgage Life Insurance Is A Bad Idea
The premium varies depending on the percentage you have as a down payment. Rates can be higher in certain circumstances such as irregular income, self-employment, or if more than one advance is being made. Typically they are as follows:
- 80+ – 85% = 1.75%
- 85+ – 90% = 2.00%
- 90+ – 95% = 2.75%
You can pay the premium yourself but most people choose to add the funds to their mortgage. (Remember this when looking at houses within a pre-approved mortgage amount.)
With the low interest rates available today there is often no benefit in continuing to rent while trying to save 20% to eliminate the CMHC fee.
Related: Pros And Cons Of Waiting To Buy A Home
Little known features of CMHC insurance
- If you want to renegotiate your mortgage (e.g. to get a lower interest rate), most financial institutions will charge a prepayment penalty that is the greater of three months interest or the Interest Rate Differential or IRD (the difference between your mortgage rate and the current rate on the outstanding balance for the remainder of the term). However, if your mortgage is CMHC insured the prepayment fee is always the three months interest penalty.
- The CMHC insurance paid on a mortgage after April 1, 1997 is portable to another property.
Open vs. Closed Mortgage
An open mortgage gives you the flexibility of paying down as much as you’d like at any time with no penalty. Interest rates are usually higher so it would only make sense if you’re expecting a large sum of money to come in, you get regular large bonuses during the year, or you expect to sell your home within the term.
Most mortgagers opt for a closed mortgage term.
Mortgage terms
Open mortgages are available in six-month and one-year terms.
With a closed mortgage you can choose from a six-month, or one-, two-, three-, four-, five, seven- or ten-year term. The longer the term, the higher the interest rate. Rates are most often negotiable.
Related: Why A 1-Year Fixed Rate Mortgage Is Worth A Look
When choosing a term think about how long you plan to stay in the home and any future life changes.
Fixed vs. variable rates
A fixed interest rate will stay the same for the duration of the mortgage term, whereas a variable interest rate will fluctuate based on market conditions (the payment remains the same but the amount paid to the principal will vary).
While some people are comfortable with the perceived risks of a variable rate, most people like to lock into a fixed interest rate.
Payment schedule
Mortgages are set up to be paid once monthly, but if your cash flow allows you may consider more frequent payments. For example, many people are paid bi-weekly and choose this frequency for their mortgage payments too.
Weekly and semi-monthly payments are also available.
Related: Take A Mortgage Payment Vacation? No, Thank You!
If you want to pay your mortgage down faster make sure you choose “rapid” frequent payments. Paying a few dollars more can lop years of the amortization and save thousands of dollars in interest.
What is the Interest Adjustment Date (IAD)?
Unlike rent, which is paid ahead, mortgage payments are paid for the period of time that has gone past. If your possession date is not on the first of the month, or you choose more frequent payments you will in most cases be charged the IAD.
Ben and Caitlyn move into their new house on Wednesday, May 1. They chose biweekly mortgage payments to coincide with their pay deposits, the next one being Friday, May 10. Since this is not a full payment period, they will pay an interest adjustment of 10 days interest on May 10 and their first full biweekly payment will be due on May 24.
Prepayment options
Financial institutions allow different prepayment options. Amounts from 10% to 20% of the original balance can be paid once per calendar year (not only the mortgage anniversary date as many people think).
The payment can be made without penalty only once in the year. Other lump sums will be charged a fee. That means if you make a lump sum payment of $5,000 in March you can’t make a $50,000 prepayment without charge in September, even if it’s within an allowable 20%.
Related: Our Fast Track To Financial Freedom
Sometimes it’s easier to increase your mortgage payment rather than save up a lump sum. Increased payment options vary from 10% to 100% more.
Check to see if you can change this payment in the future and if there will be a charge to change it.
Final words
Buying a new home is exciting, but it can also be stressful. Taking out a mortgage is a long term and expensive commitment.
Take the time to review all the options available right from the beginning to get the best mortgage product for your needs. Set up your automatic payments and then start decorating.
One of the biggest challenges many of us face is how to save for retirement when so many other things are competing for our hard earned dollars. How much of your income should you save for retirement?
Wealthy Barber author David Chilton suggests you should save 10% of your gross income for retirement. Any other savings, like for a down payment on a home or for a dream vacation, should be made on top of your core 10% retirement fund.
Related: Why The Best Time To Start Saving Is Now
Saving 10% of your income for retirement is a good rule of thumb. Unfortunately that’s become tougher to do these days when the high cost of housing eats up a good chunk of our take home pay and wages aren’t rising at the same rate as inflation.
In 1990, the average family saved $8,000 per year, which was about 13% of their gross income. By 2010, household savings had dropped to $2,500 per year – just 4.2% of gross income.
Today’s 20-and-30-somethings likely aren’t too concerned about saving for retirement when they’re saddled with huge mortgages or massive student loan debt.
That’s why the majority of us neglect our retirement savings – it always gets put off until after we’ve paid off our consumer debt, our student loans and our mortgage. Sometimes it gets put off forever because we’ll never run out of financial priorities to look after.
Related: Why Baby Boomers Aren’t Prepared For Retirement
You’ll have kids and then you’ll want a bigger car and a bigger house (or a renovation). Then you’ll need to take a big family vacation every year because you deserve to get away.
The problem is that the longer you put off saving for retirement, the more you’ll need to save later on. That’s fine, you say, because once your mortgage is paid off then you’ll ramp up your savings and take advantage of all your unused RRSP contribution room.
That’s a great idea in theory, but it doesn’t always work out in practice. Just because you’ve paid off your mortgage early doesn’t mean you’ll direct all your extra cash flow to retirement savings.
The psychology of money is fascinating. Much like the people who spend their tax refund instead of saving it, many people who’ve paid off their mortgage early just end up spending the extra cash.
So there’s no guarantee you’ll have the time (or the will) to save more for retirement down the road.
You’ll need to start saving early, but how much of your income should you save? That depends on your age and stage of life, but you’ll want to start with something – even if it’s just 3 or 4 percent of your gross income.
Related: Why Do We Save?
The key is to make it automatic – have the money come directly off your paycheque and into your RRSP or TFSA. Save what you can afford and increase your contributions every year whenever you get a raise or a bonus.
Once you’ve reached a financial milestone, such as paying off a loan or saving for a car, it’s important to continue saving that amount toward another goal – like your retirement.
When I started tracking my finances in 2010, I was still in the midst of paying off student loans and a line of credit. Most of our extra cash flow was earmarked toward paying off those debts quickly.
I was barely saving any money outside of my work pension. Once those debts were paid off, however, our goals shifted from debt reduction to saving for the future.
Related: Our Fast Track To Financial Freedom
Take a look at the chart below, which outlines how much of our income we’ve devoted to saving.
| 2010 | 2011 | 2012 | 2013 | |
| Extra mortgage payments | n/a | 1.47% | 8.67% | 10.61% |
| RRSP | 0.47% | 2.44% | 3.10% | 9.93% |
| Pension | 10.06% | 9.18% | 6.20% | 8.40% |
| TFSA/Savings | n/a | n/a | 7.54% | 4.82% |
| RESP | 0.71% | 0.59% | 1.05% | 1.93% |
| Student loan/HELOC | 13.98% | 12.45% | n/a | n/a |
| Total | 25.21% | 26.12% | 26.56% | 35.68% |
As you can see, we’ve always tried to direct a quarter of our income toward saving or making extra payments toward our debt.
Our focus for the past two years has been to pay off our mortgage faster and to increase our RRSP contributions.
This year we’re on track to save over 35% of our income. We’ll save more than 18% of our gross income for retirement, while another 10% will go toward extra mortgage payments so we can be mortgage free faster.
We’re having trouble saving for both our RRSP and TFSA so we’ve decided to focus more on RRSP contributions to reduce our taxable income. There’s only so much money to go around so you’ll need to prioritize your goals.
Related: Should You Pay Off Your Mortgage Early Or Invest?
How much of your gross income do you save, and what percentage do you allocate toward retirement versus other financial priorities?