Module 5: Saving and investing

From: Financial Consumer Agency of Canada

Transcript

Saving and Investing

Narrator: Saving and Investing.

Save regularly and start saving early. Set specific savings goals, make your money grow, and reach your financial goals through saving and investing.

Saving puts you in control. It allows you to have choices in life. And investing gives opportunities to make your money grow.

Let's begin by asking: Why save? Then we can talk about setting savings goals, learning the four steps to saving, and finally, how to increase your savings.

We will also discuss three things every investor should know.

Twitter conversation (on screen):

Theo: @Max my man! How awesome was the boyz weekend #goodtimes

Max: Was amazing @Theo! So glad I saved up to go. Worth every penny!

Why SAVE?

Narrator: The reasons to save are many.

You can save for a sense of greater security and control, to be prepared for unexpected events, to reduce stress, or to provide for a major expense. Whatever your reason, use it as a source of motivation.

Twitter conversation (on screen):

Theo: Ya @Max, now you just gotta keep up the saving habit!!!!

Max: I'm ahead of you buddy, @Theo Two words #stock #market

Theo: Okay big roller @Max! Careful you don't lose your shirt...

Setting savings GOALS*

Narrator: Research shows that, on average, Canadians save less than 5% of their income. Ideally, you should try to save at least 10% of your income. To motivate yourself, set savings goals such as a specific amount you want to save and the period of time it will take to get there.

An example of a vague and not very helpful goal is, "Get rid of my debt and save money." Without being specific, we don't know how much to save or how long it will take.

Let's try something more specific: Reduce debt by $1,000 and establish an emergency fund of $2,000 over the next eight months. Be even more detailed with your goals by identifying the steps to take to reach them.

For instance, you can add: By saving $200 every paycheque for eight months. Keep yourself motivated and focused on your savings goals. Write down your goal. It helps you to remember what you are saving for, and it makes it more real. Track your progress regularly. If you are saving for something specific, like a trip, keep a picture of your destination on your fridge or in your wallet.

Twitter conversation (on screen):

Max: @Theo Naw man, ever heard of #wallstreet? Those dudes are killin it!!

Theo: @Max ya man, those guys are pros! you gotta know what you're doing! You can win big or LOSE BIG.

Four steps to SAVING*

Narrator: Savings don't just happen. You have to make an effort and a plan to save. Here are four steps to effective saving.

Step 1: Build an emergency fund. You should save the equivalent of at least three to six months of take-home pay so you can deal with anything unexpected. Keep the money in a savings account or an investment that can be easily cashed and will not be touched unless in an emergency.

Step 2: Pay yourself first. Consider your saving as any other bill you have to pay regularly every month. Put aside a set amount, say 10% of your take-home pay, every paycheque.

Step 3: Set up an automatic transfer of money to a savings account. This can help to make saving easier.

Step 4: Make your money grow. Be sure to put your money in the savings vehicles that will offer the best possible interest rates at a risk level you are comfortable with. Give yourself time to take advantage of compound interest. Compound interest is interest that's paid on the initial deposit and also on any interest that's been earned in previous periods, so you earn interest on interest, which helps your money to grow faster.

If these steps seem challenging, just remember: you need to make saving a habit to see long-term results. Think about how you can start using the four steps today.

Twitter conversation (on screen):

Max: @Theo, Losing my money is not part of the plan.

Theo: One word @Max – #Diversify.

Max: @Theo Love the internet... "Diversification involves having a mix of investments. It's one way to reduce risk."

Theo: @Max exactly. Don't put all your eggs in one basket. Knowing you and your luck, this might be the only way you won't lose everything. LOL.

Grow your SAVINGS*

Narrator: Now we will look at different ways to invest.Every investment comes with a risk. You may not make any money, or you may even lose money. Generally, more risky investments have a higher potential return, and less risky investments have a lower return. Before choosing an investment, you need to decide how much risk you can handle.

Basically, if you are willing to risk losing your money for the potential of a higher payback, you have a high tolerance for risk.

You must also set your investment objectives and determine when you will need access to the money. You can do this on your own, or speak with an experienced financial advisor. There are four major types of investments.

Type 1: Investments that pay interest, such as savings accounts, Canada savings bonds and guaranteed investment certificates.

Type 2: Shares in a company, such as stocks and mutual funds that invest in stocks.

Type 3: Property. That includes real estate, precious metals, and art.

Type 4: Direct investment in a business.

Let's discuss a few investment options from some of these categories.

Savings accounts with interest.

You can set up a savings account with a financial institution. Interest rates vary, depending on the type of account and the institution. Use the Financial Consumer Agency of Canada's Savings Account Selector Tool to help you shop around for the account with the best rates and best features for you.

Now let's look at the guaranteed investment certificate, often referred to as a GIC.

Typically, GICs guarantee the principal – or the amount you invested – and usually guarantee the return – or the amount you earn – on your investment. Rates and terms vary by GIC type. In general, a longer-term GIC pays a higher interest rate. However, longer-term GICs may limit your access to your money or charge penalties if you withdraw your money before the term ends.

Another investment option is a mutual fund.

Mutual funds pool money from many investors. A professional fund manager invests the money in various investment products, taking into account the objectives of the fund. You must buy and sell mutual funds through a financial professional or an online brokerage account. You can generally buy and sell mutual funds at any time.

It is important to understand the mix of investments in the fund as well as the fees charged. Both with affect your rate of return. Next, we'll talk about registered savings plans. These plans allow you to save for a specific purpose while offering tax benefits.

A registered retirement savings plan, or RRSP, helps you save for retirement.

Contributions to your RRSP are tax deductible, meaning the contribution value can be deducted from your taxable income for a specific tax year. In addition, your savings can grow tax-free until you withdraw the money.

A registered disability savings plan, or RDSP, helps families save for long-term care of relatives with disabilities. Contributions to an RDSP are not tax deductible but the money in the plan grows tax-free.

A registered education savings plan, or RESP, helps you save for a child's post-secondary education using after-tax dollars. Similar to an RDSP, contributions are not tax-deductible, but the money in the plan grows tax-free.

There's also the tax-free savings account, or TFSA.

Contributions are not tax deductible, but any interest you earn on money in the account is not taxable. You could hold cash, bonds, GICs, stocks, and mutual funds in your TFSA.

Learn more about registered savings programs by visiting the Financial Consumer Agency of Canada's website.

ItPaysToKnow.gc.ca

Twitter conversation (on screen):

Max: Oh, that's so cool @Theo... there are so many options for #investing. Who knew?!

Theo @Max Welcome aboard the investment train! It pays to do your research, huh?

Max @Theo Big time! #itpaystoknow

The three "KNOWS"*

Narrator: Regardless of where you decide to invest your money, there are three main things you need to know.

1: Know yourself.

Understand your risk tolerance, your investment goals, and your timeline.

2: Know your investment.

Is it right for you? Will it help you meet your goals? What fees apply?

3: Know your financial advisor.

If you choose to work with a financial advisor, make sure that the person understands your risk tolerance and your savings goals. Verify that he or she is qualified to give you investment advice. Ask about the advisor's background, and do some research of your own.

Twitter conversation (on screen):

Theo @Max There are a lot of choices. Just be careful of investment fraud.

Max @Theo Thanks man. #toogoodtobetrue

What did we LEARN?*

Narrator: To conclude, let's summarize what we have learned.

We have discussed the different reasons why we should save, and how to motivate ourselves to save by setting goals.

We went through the four steps to savings. We also looked at different ways to make your money grow.

And finally, we discussed the importance of the three "knows": Know yourself, know your investment, and know your financial advisor. If you're not saving yet, start soon. Save regularly, and watch your money grow.

Remember to choose different types of investments, and choose investment options that fit within your risk level and help you reach your life goals.

I wish you financial success.

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