Financial Literacy Month Tips: Your Essential Investing Guide
November is Financial Literacy Month, and to set ONPHA members and tenants up for future financial success, Wealthsimple Foundation is sharing its strategy for embracing an easy (and impactful!) approach for investing.
Wealthsimple Foundation Shares their Essential Investing Guide:
This guide will help explain how to manage your money, whether you just landed your first job or you’re looking to invest that extra cash you have stashed in your piggy bank. Think of it like a tiered waterfall, but your money replaces the water flow. The water must fill up the first pool before cascading down to the next level.
(1) Erase Your High-Interest Debt and Large Debts
If you have debts with an interest rate above 5%, pay those off in full before you do anything else. If you have credit-card debt, this is you, since credit cards charge as much as 18% in interest. If you have more than one high-interest debt to pay off, get rid of the debts with the highest rate first, then move to the next highest.
The other big concern with debt is how much you have. “Depending on the client’s financial situation, the general rule of thumb is to keep a debt-to-income ratio that’s no more than about three to one,” portfolio manager at Wealthsimple, Michael Allen says.
That means multiply your income by three — and if that number is smaller than your outstanding debt (including home mortgages and car loans), try to pay it down.
(2) Build the Right Emergency Fund
Life is full of surprises and, unfortunately, some of them are bad financially. To prepare for those raining days, we advise building an emergency fund when you can with three to six months’ worth of living expenses, should you get laid off or become ill. Keep it somewhere conservative, like in a savings account.
This might feel like a bummer if you’re eager to start investing. However, if life throws you a curveball, you won’t want to take out an expensive loan to pay off unexpected bills.
(3) Take Advantage of Employer-Matched Investing Programs
Once you’ve cleared your high-interest debt and built up an emergency fund, you’re ready to invest.
If your employer matches contributions to GRSPs (Group Retirement Savings Plan), take advantage of it. Usually, employers will match up to a certain percentage of your salary, sometimes as much as 3% or even 5%. That means, if they match, you’re getting an extra 3% to 5% income.
Our advice is to contribute the exact percentage that your employer matches.. But stop there, since GRSPs have limited investment plan options. You’ll want to invest the rest of your money elsewhere.
(4) Get Yourself Some Tax-Sheltered Account Action
To encourage us to save, the government offers what are known as tax-advantaged accounts, in which money grows tax-free.
We recommend you start with these three accounts:
- The Registered Retirement Savings Plan (RRSP)
- The Tax-Free Savings Account (TFSA)
- The Registered Education Savings Plan (RESP).
Generally, a TFSA makes sense if you’re investing for a goal that comes before retirement (a home, wedding, car, etc.) or if you make less than $50,000 a year. An RRSP is better if you earn more than $50,000 and don’t anticipate taking the money out before retirement, unless it’s for a down payment on your home.
An RESP is the right choice for parents hoping to save for their children’s future education and can unlock thousands of dollars in government grants. If you have a low- to moderate-income your child may be eligible for a Canada Learning Bond benefit ($500 up to $2,000) and up to $7,200 in RESP matching.
(5) Pay Down Your Low-Interest Debt
Depending on your situation, the next best thing to do with extra cash may be to pay down other debts — even those with an interest rate of less than 5%, like a mortgage.
Why? These low-interest debts still have some interest, so it may be worth paying them off first before saving for a big purchase or investing in a personal account.
(6) Set Expert-Level Savings Goals
Up to this point, the smartest thing to do with your money is fairly clear.
One option is to max out your non-taxable registered accounts such as TFSA, RRSP and RESP. For example, if you have unused RRSP contribution room after maxing out your TFSA, you can put money in your RRSP. Another option is to put more money in an RESP so you can get the max amount of government grants for your child. Once these non-taxable accounts are maxed, you can then invest in a Personal account, which are taxable.
The rule of thumb: if you have money that you want to spend in less than three years, it belongs in a savings account. Be wary of investment folks who guarantee gains in the short term. But you know that. You’re expert-level now.
Help, I need more financial advice!
If you’re an ONPHA member and have questions, or feel like this type of personalized financial education and support would be helpful to unlock additional benefits for your tenants and their families, please reach out to info@wealthsimplefoundation.com to discuss how we can collaborate with you or deliver this type of education in your community.
This post is in partnership with Wealthsimple Foundation. Wealthsimple Foundation is a Canadian charity with a mission to help enable a brighter future for everyone in Canada through access to post-secondary education. For more details visit our website www.wealthsimplefoundation.com
