Empowering Your Financial Journey Through Informed Investment Decisions
Understanding the basics of investing is essential for anyone looking to grow their money and achieve financial goals. In 2024, over half of Canadians (51%), including Millennials and Gen Z, reported to have some form of financial plan to help achieve financial success. As newer generations start to enter the world of personal finance and investments, there is a vast world of opportunities waiting to be explored. This guide breaks down personal investing plans and products to help you start investing confidently and effectively with options available across the country.
What is Personal Investing?
At its heart, personal investing is about strategically allocating your money today with the expectation of generating a greater return in the future. It’s about putting your capital to work, aiming for growth that can help you achieve your financial aspirations.
Why is Personal Investing Important?
Personal investing is a powerful tool for building a stronger financial future. It’s crucial for several reasons:
Combating Inflation: Over time, inflation erodes the purchasing power of your money. Investing can help your wealth grow at a rate that outpaces inflation, preserving its value.
Achieving Financial Goals: Whether you’re saving for retirement, a down payment on a home, or your children’s education, investments can help you reach these significant milestones.
Wealth Creation: Through the power of compounding, where your earnings generate further earnings, consistent investing can lead to substantial wealth accumulation over the long term.
Different Types of Investments: Exploring Options in Canada
Canada offers a diverse range of investment channels, each with its own characteristics and benefits. To build a successful portfolio, it’s important to understand two key components: the investment accounts that hold your investments and the investment products you can own within them.
Investment Accounts
Think of these registered accounts as special “containers” for your investments, each offering unique tax advantages.
- Registered Retirement Savings Plan (RRSP): An account designed for retirement savings. Your contributions are tax-deductible, and the investments within it grow tax-deferred until you withdraw them in retirement. In 2023, the average RRSP account value in Canada was $113,070, though this was down from $144,613 in 2022. The average RRSP contribution in 2023 was $6,512, up from $5,753 in 2022.
- Tax-Free Savings Account (TFSA): A flexible account where your investments can grow and be withdrawn completely tax-free with a cumulative limit of $102,000. It offers flexibility as contributions can be withdrawn at any time without penalty. In 2023, the median contribution to a TFSA was $6,500, which was the annual contribution maximum for the year. TFSA values hit an average balance of $44,987 in 2024, an all-time high, representing an 8% increase from the 2023 average balance of $41,510.
- Registered Education Savings Plan (RESP): An account specifically for saving for a child’s post-secondary education, which can attract government grants.
- Registered Retirement Income Fund (RRIF): A RRIF is an account converted from your RRSP, typically by retirement or by the age of 72. A RRIF has a minimum withdrawal each year where these withdrawals are taxable.
Investment Products
Once you have chosen an account, you can fill it with various investment products. Here are a few common types:
- Stocks: A stock represents a share of ownership in a publicly-traded company. Its value can rise and fall based on the company’s performance and market conditions.
- Exchange-Traded Funds (ETFs): ETFs are a type of investments, that are traded on stock exchanges holding baskets of assets like stocks, bonds or commodities. They offer diversification and are a popular way to invest in a whole sector or index at once.
- Mutual Funds: Mutual funds pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities, managed by a professional fund manager. Net investment in mutual fund shares reached $107.6 billion in 2024, marking it as the strongest year since 2021.
- Guaranteed Investment Certificates (GICs): A GIC is a lower-risk investment that guarantees your initial investment while providing a fixed rate of return over a set term. In 2024, 35% of Canadian investors reported holding Term Deposits or GICs.
Exploring Alternative Investments: Mortgage Investment Corporations (MICs)
For investors looking to diversify beyond traditional options, alternative investments like a Mortgage Investment Corporation (MIC) can be a valuable addition. A MIC pools investor funds to provide mortgages for real estate. As a shareholder, you earn returns from the interest income generated by these mortgages.
A key advantage is that MICs can be held within your registered accounts, like an RRSP or TFSA. This allows you to combine the unique return profile of real estate-backed investments with the powerful tax advantages of your chosen registered plan, creating a well-rounded and tax-efficient strategy.
How to Start Investing: A Beginner’s Guide to Personal Investing
Embarking on your investment journey might seem complex, but breaking it down into manageable steps can make it approachable and effective.
Steps to Start Investing for the Future
Starting your investing journey begins with setting clear financial goals. Whether you aim to save for retirement, a major purchase, or simply grow your wealth over time, defining your objectives is crucial. Next, consider your current financial situation and determine how much you can comfortably afford to invest regularly. This often involves establishing an emergency fund first and addressing any high-interest debt. Opening an investment account is the next step; you might choose a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP), depending on your specific needs and tax situation. Once your account is set up, take the time to educate yourself about the basics of investing and various investment options available to you.
Choosing the Right Investment Account
Selecting the right investment account is fundamental to optimizing your investment returns. For tax-conscious investors, a TFSA allows your investments to grow tax-free, and withdrawals are also tax-free. An RRSP, on the other hand, provides tax advantages for retirement savings, where contributions are tax-deductible, and investments grow tax-deferred until withdrawal. Understanding the differences among these and other investment accounts can help you strategically plan your savings and investments, ensuring you are well-positioned to achieve your financial goals. In 2023, 11.3 million tax filers in Canada contributed to either an RRSP or a TFSA.
Key Investing Terms Every Beginner Should Know
As you embark on your investing journey, familiarizing yourself with essential investing terms will empower you to make informed decisions.
- Risk Tolerance: This refers to your ability and willingness to withstand market fluctuations and potential losses in your investment value. Understanding your risk tolerance is crucial for selecting investments that align with your comfort level.
- Risk Capacity: Your objective ability to endure potential financial loss, often determined by factors like your income, expenses, existing assets and liabilities. It is measured by how much financial risk you can afford to take without jeopardizing your financial stability.
- Time Horizon: This is how long you plan to invest before needing the funds. Your time horizon significantly influences the types of investments suitable for you; longer horizons generally allow for higher-risk, potentially higher-reward investments.
- Diversification: This fundamental principle involves spreading your investments across various asset types, industries, and geographies. Diversification helps to manage risk and can improve your chances of achieving favorable investment returns by reducing the impact of poor performance in any single investment.
Having a solid grasp of these terms will empower you to make informed decisions as you navigate the world of personal investing.
How Can You Achieve Your Financial Goals Through Investing?
Investing is a powerful engine for achieving your financial aspirations. With a structured approach, you can effectively leverage investments to work towards your future.
Setting Realistic Financial Goals
Achieving your financial goals through investing starts with setting realistic and attainable objectives. Instead of vague aspirations like “I want to be rich,” consider specific, measurable goals such as “I want to save $100,000 for retirement in 20 years” or “I aim to save $20,000 for a down payment on a home in five years.” Setting measurable goals will help you create a clearer investment strategy and timeline. Break down larger goals into smaller, manageable milestones to track your progress and stay motivated along the way. Establishing achievable financial goals will provide you with a clear roadmap for your investing journey. To understand the landscape, it’s helpful to know that in 2023, the average Canadian household saved about 3.74% of its disposable income. While this figure is heavily influenced by a high cost of living, it also reflects our daily spending choices. This is precisely why creating a personalized investment strategy is so crucial—it empowers you to consciously direct your money, rise above the average, and turn your financial goals into a reality.
Creating a Personalized Investment Strategy
With your financial goals established, it’s time to create a personalized investment strategy that aligns with your unique circumstances. This strategy should take into account your risk tolerance, investment horizon, and available investment options based on your individual situation. For instance, a long-term goal might allow for a portfolio with a higher allocation to growth-oriented investments, which are designed to appreciate in value. For a shorter-term goal, you might prioritize more conservative options focused on protecting your capital. Tailoring your approach will set you on the right path to grow your money effectively over time. As of February 2024, residential mortgage debt in Canada stood at $2.16 trillion, representing a 3.4% increase compared to February 2023. This growth, while slower than previous years, still indicates a growing market.
Tracking Your Progress and Adjusting Your Strategy
Finally, achieving your financial goals through investing requires consistent tracking and occasional adjustments to your strategy. Regularly review your investment portfolio to assess performance and ensure it remains aligned with your objectives. If you find that certain investments are underperforming or that your financial situation has changed – perhaps a new job, a significant life event, or a shift in your risk tolerance – be prepared to make the necessary adjustments. The mortgage delinquency rate in Canada continued to climb in the first quarter of 2024 (0.188%), though it remains well below the 0.28% rate seen pre-pandemic in 2019. This highlights the importance of managing your financial situation proactively. By actively monitoring your investments and being willing to adapt, you can stay on course to achieve your financial goals and secure a prosperous financial future. Notably, households under 35 were the only age group to consistently lower their mortgage debt throughout 2024, with their average balances dropping 4.7% year-over-year in Q4. This trend suggests a strategic approach by younger Canadians in managing their debt.
Our Investments Team: Your Trusted Allies
At PHL, we are your trusted ally, dedicated to helping you achieve your financial goals and build a stronger financial future. Our seasoned team, with decades of experience in real estate and finance, leverages deep expertise to offer innovative mortgage solutions and offer innovative mortgage solutions that have historically generated reliable returns for our investors. We prioritize building lasting partnerships based on trust, transparency, and mutual respect. At PHL, we have historically secure and reliable investment opportunities that are readily available for portfolio diversification. Beyond access to these opportunities, you gain a team committed to your financial success. Our team offers sage advice and insights, empowering you with the information to make informed decisions and truly guiding you through education every step of the way.
To learn more about how you can get started on your investment journey, book a call with our Dealing Representatives.
DISCLAIMER: This article is for information purposes only, and you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on this webpage constitutes a solicitation, recommendation, or offer to buy or sell any securities. Certain information on this webpage may contain certain “forward-looking information”, and these statements are not guarantees of future performance. Such forward-looking statements involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. Past performance does not guarantee future results.
