Before you can start diving into the stock market, or any other of the much more complicated investment vehicles, you need to save capital to invest with. Nothing beats a TFSA account when it comes to saving – and keeping all of the money you’ve contributed.
Let’s walk through a quick personal journey of mine;
Before I started investing — and still to this day — I would remind myself, through images and videos, of the lifestyle I wanted to live.
I wanted the luxury of free time and the power of money.
I knew that lifestyle didn’t come easily to anyone. I knew I would have to work hard and smart to achieve it.
What I also knew was that investing was one of the many ways to get there.
It also so happens to be one of the most self-controlled paths to take to success. What I didn’t know, however, was where to start.
The most obvious answer was the simplest one: Saving.
If you want to start investing and become more involved with the financial markets, you first need to understand that nothing is as secured than saving your hard cold cash.
Let’s say you find yourself in an unfortunate event and you require capital as soon as possible, where would you get it from if you had not saved anything?
Would you ask your family and friends?
Save yourself the embarrassment and time.
You need access to funds that are readily available to you.
Here’s a post on ‘The Cushion Effect’ system I use to ensure I always have funds available.
You should definitely start there before investing. It’s like covering your tushy before sitting on a public toilet.
You never want to invest with the same funds that are going to bail you out from a bad situation.
So we come back to our point now; saving is the very first step to investing.
Unless you inherit some funds to invest with, you have got to save capital to invest. Here’s where the good stuff comes into play.
You can save money, and it can still be considered investing.
How? In Canada, we have what’s called Tax-Free Savings Accounts (TSFA).
This means that you actually get to save money, earn interest on that money, and not pay a single penny — correction, not pay a single nickel — to the government in taxes.
It’s all yours. They’re actually letting you keep it.
The only catch to these bad boys is that you have an annual limit that you can deposit that will remain tax-free.
Any other contributions that surpass the limit are subject to a 1% penalty tax. FYI, the contribution limit at the time of this post is set to $5,500 annually*.
Here’s another cool thing: there are options whereas you save your money in a TFSA, you can invest directly out of that same account and not pay taxes on your capital gains.
You buy shares of Blue Chip Co., whose payout is an annual dividend of $3 a share. They pay it directly to the account your shares are held in — in this case, your TFSA.
Because you invested through this account, the annual $3 dividend disbursement from Blue Chip Co. is 100% yours and non-taxable.
Thank you, Canada. (American Version Coming)
Now that there’s an understanding about saving being the primary step to investing, you now know to start investing today.
Most financial institutions have their TSFA information online easily accessible to their customers.
Take a quick look to get some more information about certain features your financial institution may offer on their accounts.
If you’re looking to open up a TFSA, then the following should be helpful to you.
There are many financial institutions that want your money – to borrow.
In return, they’ll pay higher interest rates for holding your savings with them.
But why is that?
Believe it or not, FIs (financial institutions) use the funds the customers save with them as a loan to the bank.
They pay you the interest on this loan for as long as you ‘lend’ it to them (save with them).
They take your funds and flip it into many other financial products to provide to their clients (i.e. credit cards, PLCs, etc).
With that being said, some financial institutions seek to compete against the bigger players, and offer higher returns on their savings accounts to attract customers to bring their money – especially for TFSA accounts.
Check out this chart for current rates:
Now that we’re familiar with a very simple investing concept, feel free to roam the Young&Broke Investing articles to learn more about investing as you save.
Best to always be prepared for when the funds are ready to make bigger moves.