Investing your hard-earned money to make it grow

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Welcome to the fifth and last installment of this newsletter course. (You can sign up for the full course here.) Today’s topic: how to invest your hard-earned money in the financial market to help you afford the life you want in Canada.

Here’s the good news. This country offers plenty of options to invest in high-quality financial instruments with minimal effort and cost. There are also a variety of so-called “registered accounts,” special investment accounts where your money can grow tax-free (I mentioned some of them briefly in the housing newsletter).

Now, for the not-so-great-news. It’s also very easy in Canada to pay high fees for mediocre – or downright awful – investments and investment advice. The key to making the most of your savings is to educate yourself about investing and to research your options. This newsletter will help set you on the right path.

Finally, my parting real-life tip is about one of my favourite Canadian-isms.

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Where to save and invest your money

There are two main types of accounts where you can hold your savings: savings accounts and investment accounts.

Savings accounts:

Savings accounts are a type of bank account designed to hold cash. Unlike chequing accounts – which are meant for day-to-day banking – they pay interest on your deposits.

• Watch the interest rate: There’s a great variation in how much interest you can earn in a savings account. Often (but not always) you’ll find the most competitive rates at online banks and credit unions. Beware that many banks offer high introductory interest rates that drop a few months after you’ve signed up for a new account. You can use sites like Ratehub.ca or WOWA.ca to compare savings accounts.

Investment accounts:

These accounts allow you to hold your savings in investments such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). Investment accounts come in two varieties:

• Registered accounts (so called because they’re registered with the federal government) come with tax perks and strict rules about eligibility, contributions and withdrawals.
• Non-registered accounts have none of the tax advantages and fewer rules.

Registered accounts:

Here’s the basic idea: the government gives your investment gains a preferential tax treatment to help you save up for various long-term goals. This, friends, is a thing of beauty: The ability to let your investment returns grow and compound tax-free can make a world of difference over long periods of time. Here are the most common types of registered accounts:

• RRSP: Registered Retirement Savings Plans are meant for retirement savings. The basics:

a) Money you put into an RRSP is tax deductible. This means the amounts you contribute reduce your taxable income in the year you put those funds into the plan.

b) Your investments grow tax-free while held inside the account.

c) Withdrawals are taxable and there are several disincentives to taking money out before retirement.

Usually an RRSP works best if you’re in a higher tax bracket when you contribute to it than when you make withdrawals, ideally in retirement. In that scenario, the rate at which you receive a tax break putting money in will be higher than the rate at which your savings are taxed on the way out. Many people have lower expenses, and therefore need lower incomes, in retirement compared to their peak earning years. But keep in mind that’s not the case for everyone.

Dig deeper: There are many more rules you should be aware of. You can read more on RRSPs here.

• TFSA: A tax-free savings account works well for both retirement and other savings goals. The basics:

1. There is no tax break on contributions.
2. Your money inside the account generally grows tax-free.
3. You can take money out tax free whenever you want.

Using a TFSA rather than an RRSP for retirement savings can make sense if you’re in a lower tax bracket or don’t expect your income will decline in retirement. Many Canadians contribute to both their RRSP and their TFSA for retirement. However, flexible, tax-free withdrawals mean a TFSA also works well for shorter-term savings goals. Some people also store their emergency savings in a TFSA.

Dig deeper: Here’s more on TFSA rules.

• RESP: Registered Education Savings Plans are meant to help you save for your child’s postsecondary education, which can cost tens of thousands of dollars per year in Canada. Here are the basics:

1. The government will match a portion of your contributions. There are also funds available for low-income families without the need to make deposits.
2. Investments grow tax-free inside the account.
3. Withdrawals that serve to fund the child’s studies are either tax-free or usually subject to a low tax rate.
4. If your child doesn’t pursue higher education, you keep your deposits and can transfer up to $50,000 in investment gains to your RRSP tax-free (if you have that much contribution room there).

The bottom line: RESPs can be a big help in financing your kids’ education. They can be used for university, as well as a variety of other programs after high school.

Beware: You can open an individual, family or group RESP. The latter usually come with high costs and very strict rules, and the companies that offer them – called scholarship plan dealers – often target newcomers with aggressive sales tactics.

Dig deeper: Here’s more on RESP eligibility and other rules.

• FHSA: The first home savings account is meant to help you save to buy your first home. It brings together the tax perks of an RRSP and those of a TFSA: contributions are tax-deductible and withdrawals tax-free. And, of course, your money in the account grows tax free. You can contribute up to $8,000 a year, up to a lifetime maximum of $40,000.

Dig deeper: See here for more details about the First Home Savings Account.

There are other kinds of registered accounts. You can read up on them here.

Non-registered accounts:

Inside these accounts, investment gains are taxable in the year in which they occur.

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Options to invest in financial markets

Types of investments:

Stocks, bonds, exchanged traded funds (ETFs), mutual funds … if you’ve been investing in your home country, most of Canada’s investment products will be familiar. Here, l’ll talk about guaranteed investment certificates (GICs), which are specific to Canada, and your options if you’re seeking Shariah-compliant investments.

• GICs: They’re a super safe investment. You lend money to a financial institution and get it back with interest at the end of your term (this can range from a few months to a few years). Also, your principal is protected: You’re guaranteed to get back at least the money you put in. That said, there are usually penalties for redeeming your money before the end of the term. This makes GICs a good option for growing short-term savings but not ideal for emergency funds.
• Shariah-compliant investments: So far there are two main options: Global Growth Assets’ Global Iman Fund and Wealthsimple’s Shariah World Equity ETF.

Three ways to invest:

• Self-directed investing: You build and manage your own portfolio of investments through an online discount broker. You don’t have to be a math whiz or spend hours poring over investing charts to do this. For example, all-in-one ETFs (also called asset-allocation ETFs) allow you to invest in a very broad basket of stocks and bonds by simply buying and holding a single investment. Here’s the Globe’s latest ranking of the best digital brokers.
• Robo advisers. These are services that professionally invest your money for you at low cost, usually using low-fee ETFs. When you sign up, you’ll have to answer an online questionnaire, which will help robos match you to a pre-built portfolio of investments that fits your needs and risk tolerance. Robo advisers can be a good way for beginners to get started investing. Here’s the Globe’s robo adviser guide.
• Investing with an adviser: You can go to the bank or a wealth management firm and get an adviser to invest your money for you. This is how most Canadians invest, and many aren’t getting their money’s worth. You’re likely to pay high fees and commissions, but over several years you’ll find that most advisors and investment managers underperform investments that – like all-in-one ETFs – simply mirror broad market benchmarks.

Fees and commissions:

• Watch the fees. Fees reduce your profits and amplify your losses from investments. Like taxes, fees can make a big difference to your investment returns over the long term. You can learn more about the types of fees and commissions you may encounter here.
• Fees and commissions can affect your adviser’s incentives. Investment advisers may receive commissions every time they buy or sell an investment for you. They may also have an incentive to steer you toward certain products with higher commissions or to keep you invested in certain products. Or they may get paid based on how much you invest. Here’s a guide to how an investment adviser is paid, and here’s how to choose an investment advisor.

Learning about the basics of investing: Never invested before? Read the Globe’s beginner guide to investing.

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🍁 SURVIVE AND THRIVE TIP

The English language over here comes with a few delightful Canadian-isms, such as “toque” (a beanie, or cap), “double-double” (the only acceptable way to drink Tim Hortons coffee, really), and “two-four” (the ubiquitously popular 24-pack case of beer). And, of course, there is emphatic “eh,” which Canadians sprinkle liberally in most questions: “This newsletter course is great, eh?”

My favourite, though, is the phrase “the great Canadian.” You’ll find shops called “The Great Canadian Bagel” or “The Great Canadian Poutinerie” (read all about poutine here, by the way) and see the expression used to describe or rank just about anything considered quintessentially Canadian.

To me, it’s a phrase that encapsulates all the promise this big country holds for newcomers. So, welcome to your great Canadian adventure. I wish you all the best and hope that this newsletter helps you along the way.

Dive deeper with Savvy New Canadians

Run by Enoch Omololu, a money expert and veterinarian who moved to Canada in 2011, the website Savvy New Canadians has become a destination for newcomers seeking personal finance information.

For more investing:

Registered vs. Non-Registered Investment Accounts: Factors To Consider

How to Invest Money in Canada as a Beginner: Step-by-Step Guide

Management Fee vs. MER: What are the Differences?

Keep going with Globe personal finance columnist Rob Carrick

Rob Carrick, the Globe’s personal finance columnist, has helped Canadians make sense of investing, the housing market, retirement planning and every money-related topic under the sun for more than 30 years. He is one of Canada’s best-known and most-trusted sources on anything that might affect your wallet.

You can read Rob’s latest articles here.

Sign up for Rob’s twice-weekly newsletter here.

Listen to Stress Test, the Globe’s personal finance podcast hosted by Rob and Globe personal finance editor Roma Luciw, here.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.