Money School – My Little Nest Egg
Investment Options for Young Adults
Making good investment choices starts with your first investment, so it’s important to understand what options you have and why they may be a good choice or a bad choice for you and your money.
The best way to find out what is right for you as you begin to choose investments and grow your money is to speak with someone at your Credit Union. They can find out if you have any short or long-term goals and find you ways to invest wisely to meet them.
Investments sometimes come with risks. The general rule is that the more earnings you could possibly make on an investment, the higher the risk to the original amount. Some people cannot tolerate any risk, and others don’t mind it. For the first-time investor, low-risk choices may be best, but if you are investing for your retirement in 40+ years, you may be able to tolerate a bit more risk.
Over and above a regular savings account, here are some brief explanations of some of the basic types of investments available and what you could expect from them:
GIC or Term Deposit:
A Guaranteed Income Certificate is true to its name. It guarantees that your investment will earn a set level of income. This money is “locked in” for a term ranging from 30 days up to multiple years—the longer the term, the higher the interest rate. There is no risk to your initial investment and once the term is finished, you get it all back plus the quoted interest.
You may not take your money out of a GIC before the term is up. Or, if you do, you lose the interest earned, as you did not leave it in for as long as you “promised”. Government bonds work in a similar way.
Mutual Funds:
The word “Mutual” means it is a shared fund investment. Investors in Mutual Funds can put in a relatively small amount of money each, but when pooled with all investors, it creates a larger investment amount and can be used to invest in stocks, bonds, equity, index funds and more.
Mutual funds come with some risk. You must be prepared to have your investment value go up and down as markets fluctuate. There is no guarantee that a Mutual Fund will hold its full value in volatile times, but certainly they are much more stable than investing in the stock market directly. They also offer the POSSIBILITY of higher earnings than a fixed rate investment.
An investment manager manages these funds, so they take the guesswork out of it for you. You would want the Mutual Fund for your investment to have a mixture of the types of investments that make you comfortable.
RRSP:
Registered Retirement Savings Plans are designed to assist you in saving for your retirement. They are an essential part of any good investment plan and a great idea for any Canadian who earns employment income.
RRSPs can be opened with very small investments, and can be beneficial if you arrange to contribute to them every month or every paycheque.
Within an RRSP, you can choose different types of investments, such as RSP savings accounts,
RSP GICs, RSP Mutual Funds and so on. The government allows you to contribute a percentage of your yearly income, but it is quite a generous limit.
Why not just put money away in any investment for retirement? The true benefit of an RRSP is that all the interest earned within the plan, stays within the plan and is NOT taxable until you take the money out.
RRSPs let you earn income on your investments and keep it all until a much later date, when it is assumed you will use the money in small amounts over time, and be taxed at the lower rate.
If you cash your RRSPs before retirement, you lose your investment potential, but you also must pay income tax on all earnings up to that point in that year.
TFSA:
Tax-Free Savings Accounts are available for all Canadians over the age of 18. They offer the flexibility of a savings account, but the tax-free benefits of other investments. You can contribute up to $5,000.00 per year and not pay tax on any interest earned.
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