1. Pay yourself first
One of the most effective ways to build your savings is to set up pre-authorized biweekly or monthly contributions that automatically move money from your paycheque to an investment account. Get that money into registered retirement savings plan (RRSP) or tax-free savings account (TFSA) before you have a chance to spend it and you’ll barely miss it. You’ll also get the benefit of dollar-cost averaging, buying more shares when security prices are low and fewer when prices are high. This can help reduce timing risk and the impacts of volatility.
2. Trim your tax bill
Tax-sheltering your money is an easy way to boost savings. RRSPs let you defer tax on a portion of your income until retirement, when your tax rate will likely be lower. The RRSP’s other big benefit is that the investments grow tax-deferred until you make withdrawals, meaning you don’t have to pay capital gains taxes when you sell your investments, nor do you have to pay tax on the annual dividends or interest.
TFSAs are another great way to grow your investments while minimizing taxes. Unlike with RRSPs, money put into a TFSA earns no upfront tax refund, but the government doesn’t get a single dime of your money when your investments earn a return or when you withdraw any money.
3. Debt first, savings later
It’s futile to start investing if you’re also struggling to pay off credit cards or unsecured lines of credit with interest rates as high as 28%. By comparison, the long-term expected return on stocks is 6% to 8%. “Getting rid of high-rate debt earlier will get you ahead,” Certified Financial Planner Jason Heath has said.
4. No plan is permanent
You can’t put a portfolio together until you’ve identified your specific goals and developed a plan for reaching them. But realize your original plan will never come to fruition exactly as envisaged. “No one has any clue what the landscape will look like 30 years from now,” said Hamilton. Plans must be revisited yearly and adjusted due to changes in your personal life: job loss, birth of a child or divorce, for example. “What’s important is the process of looking ahead and adjusting your plan and changing it all the time,” he said. “That process is navigation.”
5. Pass on your financial knowledge
We all want our kids to be responsible and well-mannered. But how about being financially savvy? Teach your children the value of a dollar by showing them how to grow their money. For adult children, 18 and older, contributing to a TFSA is a good idea. But younger kids need short-term goals, like saving for a new bicycle. The best way to teach, of course, is by example.
Also, opening a registered education savings plan (RESP) for them is a good way to prep for their future.
6. Focus on the big picture
Too many people don’t look at their portfolio as a whole and instead focus on the finer details because they seem more interesting, said Hallett. “It’s natural with the amount of information coming at you online and through the news to feel prompted to do something with your portfolio as a response. Most of the time that’s not a good idea.” Instead, all portfolios should be driven by the fundamentals of selecting an appropriate asset allocation and sticking with it.
7. Branch out and diversify
Many investors keep 100% of the equity portion of their portfolios in Canadian stocks, something academics call “home-country bias.” Sure, Canadian stocks may feel comfortable, but don’t forget that Canada represents just 3% of the global stock market. A well-diversified portfolio should tap into global stock markets to increase your investment opportunities and reduce the risks from a crash in one region.
8. Beware of biased advice
Many advisors in Canada receive commissions from the financial products they sell. This can create two potential conflicts of interest:
1.It may limit the range of products they’re able to sell.
2.It may motivate them to sell you more expensive products even when cheaper options exist.
A better alternative to consider may be a fee-based advisor who is paid directly and transparently by you, meaning you’re more likely to get unbiased advice.
9. Pay off your mortgage quickly
Putting more down on your mortgage could save you thousands in interest charges. Consider simple strategies like opting for accelerated biweekly payments (so you make 26 payments per year instead of 24). Also, consider applying any bonuses from work or other windfalls to your mortgage up to your annual prepayment limit. Even a small amount can go a long way. For instance, an annual lump sum payment of just $1,000 on a $500,000 mortgage at 5% over 25 years will decrease your mortgage amortization by about one year and eight months.
10. Consider inflation
Inflation can be a serious threat to long-term wealth. Even if you are extremely risk-averse, it’s prudent to keep at least 25% of your portfolio in stocks: preferably stable dividend payers that keep raising those dividends. Other inflation hedges include real return bonds or ETFs that package them up, inflation-indexed annuities and gold/precious metals.
Source: www.moneysense.ca
