Investing your money has never been easier. This article will guide you on how you can start investing with little money.
For many people, the term “investing” is intimidating and can leave you feeling like an imposter if you’re new to it all. It’s really not like that at all. Investing is on a spectrum regarding how much you choose to invest and the risk level you choose to associate with your investments.
As the market fluctuates, so does your money. Simply put, investing is a way to put your money to work. It’s never too late to start investing your money, even if you only have an extra $50 or $100 per month. Don’t underestimate the power of compounding interest on the money you invest.
So, let us break down a guide for beginners who are eager to start building their wealth.
What Are Your Investing Goals?
When you first decide to start investing money, you should have a goal in place. Are you looking for long-term wealth building? Do short-term investments interest you because of the flexibility to pull out quickly? What are your financial goals, both short-term and long-term?
Before you decide and commit to investing your money, consider a few significant points;
- which types of investments do you want to purchase
- how you want to manage your portfolio(s)
- which financial institution(s) you will use to begin investing
Many options are beginner-friendly. Let us go over a few.
1. Tax Sheltered Retirement Account.
This might be the most prominent and commonly known type of investment. It’s created and regulated by the federal government for purposes of retirement planning. It offers options for investing in retirement with tax-deferred and tax-free account options, depending on your choice.
All you need to do is shop around for different rates and fees. I suggest starting with the bank you deal with and inquire about their service options. Once you decide, set up an account. You can either create automatic payments with a set frequency or deposit whenever you choose.
- Registered Retirement Savings Plan (RRSPs) Tax-Deferred Account. An RRSP is designed to help Canadians transfer some of their taxable income into their RRSP account. The money deposited is automatically sheltered from tax, which is also known as tax-deferred. It will only be taxed once the money is withdrawn from the RRSP account. There is a maximum contribution amount allowed annually, which is set by the Canadian Revenue Agency (CRA) and adjusted annually. As of 2021, the annual RRSP contribution limit is 18% of your total earned income or a maximum of $27,830. Any yearly investment income (capital gains, interest, dividends) is tax-free if they remain in the RRSP account. They will be subject to a tax rate applicable to your annual income amount when they are withdrawn.
- Tax-Free Savings Account (TFSA) Tax-Free Account. The TFSA was introduced to Canadian’s in 2009 and is slightly different from the RRSP. With this option, you deposit your after-tax income; therefore, you are not required to pay taxes when you decide to withdraw any funds. A TFSA can hold a wide range of investment products depending on your choice. Any investment income (capital gains, interest, dividends) is tax-free when it is in the account and when withdrawn. The maximum limit, which is also set out by the CRA, is $6,000 annually. Keep in mind that Canadians are allowed to retro deposit money into their account as far back as its inception in 2009. Therefore, it would allow for a total contribution amount of $75,500, the sum from 2009-2021.
- Registered Disability Savings Plan (RDSP). The RDSP was created to help Canadians who live with a disability save for the future and their retirement. This is an investment plan designed specifically for Canadians who qualify for the disability tax credit. There is no annual maximum contribution limit but a lifetime contribution limit of $200,000 set out by the CRA. An added bonus to this benefit is that any withdrawal is not considered income; therefore, will not impact any income-based benefits you are receiving during the time of withdrawal.
2. Mutual Funds (MF).
A mutual fund is a professionally managed investment fund that pools money from investors like yourself and uses that money to purchase many investments. Think of it as pooling your money with many other people in a The benefit of buying a mutual fund is that you gain ownership of many investments in the fund, which would be challenging to do individually. The benefit to purchasing a mutual fund is that you gain ownership of a large number is investments in the fund which would be difficult to do individually. There is no minimum investment amount and no frequency requirement. If you want to invest $5/weekly or $5,000/weekly, the choice is entirely yours.
3. Exchange-Traded Funds (ETFs).
ETFs are similar to mutual funds in how they are designed. It is an investment fund that comprises many stocks, bonds, and commodities. Because they are traded on the stock exchange, they can be bought and sold throughout the day which is what separates them from an MF which is bought and sold at the end of the closing of the day where its price is evaluated. They also offer the added benefit which allows the investors to gain ownership of many investments through one portfolio. There is also no minimum investment amount or frequency in which you need to invest and no maximum number of ETFs you can buy.
Individual ownership of a chosen corporation via purchased shares. Basically, you become part owner when you buy one share in a public company of your choice. The more shares you purchase, the greater your degree of ownership. Stock’s differ from MF’s and ETF’s in the minimum investing cost. Each company has its own share price and some don’t charge any fees to open an account.
If you are interested in purchasing stocks, you need to select and register with an online broker. Questrade is well known to be one of the best when considering its fees.
How To Manage Your Investment Portfolio
All banks offer financial advisors who specialize in managing investment portfolios. This can be an excellent option for anyone seeking expert advice as they start their journey. Keep in mind, a financial advisor does cost up to 1.2%, depending on the size of your account. Some people advise against paying an advisor, and others recommend it. You choose what works best in your life and for your financial situation and goals.
A Robo advisor is a cloud-based advisor designed to manage your investment portfolio at a much cheaper rate than you would pay for a financial advisor. Every financial institution has its respected rates, which are listed on their websites. A Robo advisor is an excellent option for beginner investors as they manage and guide your portfolio(s).
Thanks to technology, self-managed investing has never been easier. So long as you have a basic understanding of investing, you can manage your investments without the aid and fees of an advisor.
A few drawbacks to consider are that you will need to do all the research and analysis yourself. It can be highly time-consuming, and you will need to be up to date and on top of tax laws about investment income.
Keep in mind, if you’re new to investing with a particularly low-risk tolerance, it is wise to be cautious of where every dollar is going.
Before I started investing, I misunderstood what investing meant. My belief was that investing requires a lot of money. My knowledge was limited; therefore I was unaware that investing a small automated biweekly payment into a mutual fund account was sufficient. I didn’t understand that even small contributions can have a significant impact on my retirement fund. Wealth creation isn’t an overnight success. It is incremental growth, and in most cases, it starts off small.
I learned this mentality was the only thing keeping me from investing in my future. So I set up accounts and dove into the world of beginner investors. You can indeed begin investing with little money because, remember, investing your money will compound in market value. Put every dollar to work.
A little tip I live by. Whenever you receive a salary promotion, I recommend adding that extra income directly into your investment account (assuming you have no other vital obligations).
Income growth should not equate to lifestyle inflation. Stay modest, live within your means and invest in your future.
Automated Investing With Wealth Simple
There are many options when it comes to choosing the right financial institution for your investing needs. You can start by visiting with a financial advisor at the bank you currently use and review their options. If you want something different, you can always review online investment management services such as Wealth Simple. There are many more options, though this is my top pick for beginners.
Wealth Simple is a Canadian Robo advisor investment service focused on millennials. It is designed in a way that gauges your risk level, and your preferences, thus attracting risk-averse investors. This is not to say it is designed for risk-averse investors only. Actually, it has a broad range of options with a wide range of risk levels you can set yourself.
They offer RRSP, TFSA, Crypto, and so many other investing options.
It’s as simple as setting up a free account and setting up free automated deposits. They offer automated rebalancing and dividend reinvestment, and there are no fees to transfer in or out of your account. They are diverse in who they target, but they have something for everyone.
As you can see, there is no minimum amount required to set up a basic account. If you can only commit to a $5 biweekly deposit, the basic plan is set up for your unique needs. Something is always better than nothing. All you need to do is browse their website, download their app and get a feel for it.
For beginners who are interested but struggling to try to get on track with budgeting and saving extra money for investing, take a look at my step-by-step guide to help get on track.
So here are a few tips and some helpful introduction advice to get you started. As you can see, there really are no barriers to entry into the investing world. Once you start and can visualize the power of investing, you will realize that taking the first step was the best investment you could have made for your future self.