Behind the Numbers Classroom

Hi, everyone. Welcome back to Episode 3 of the Financial Literacy Series. My name is Francis Lutfy, as always. And we are here to talk about the nitty-gritty, your first real steps towards investing. So by the end of this video, and if you want to be a successful investor in general, you need to be able to answer these three key questions. Number 1, what is a TFSA? Number 2, what is an RRSP? And number 3, why are these two acronyms useful? Why should I know what they are?

So let's start off with question number 1. What is a TFSA? So a TFSA stands for Tax-Free Savings Account. A little confusing? Let's just break it down. Tax-free, that means I'm not paying taxes. It doesn't mean the taxes are free. It just means there's no taxes, OK? What are taxes, however? Well, when you make money-- when you have a salary, a part of that goes to you obviously. And a small part of the money you make also goes to the government. Whether it's federal or provincial, it takes a small part of your money. And that is what we call taxes.

OK, but why am I paying taxes? Or why is the government taking my money? Because they're the one who fund things like your schools, your hospitals, your roads, et cetera. So the government needs money to do these things. And how does it get it? By taxing its citizens. And not only are you taxed on your salary, you are also heavily taxed when you invest your money. So let's say I have $10, on which I already paid taxes, and then I transform it to $20-- thanks to very smart investing.

Well, the government is going to take another amount of that money and I'm going to end up with for example, $15, because the government taxed it. So that is why you want to avoid taxes as much as possible legally. And a TFSA is a perfectly legal way to do so. So let's create a TFSA right here, right next to me. And we're going to take the same situation as last time. We're going to take $10. And I'm very smart with my investments. I transform it into $20. What happens? Do I pay taxes on it? No, I get to keep that $20, because it is in my TFSA.

So that is the advantage of owning one of these. So you absolutely want to put your money in a TFSA as soon as you are 18 years old. So the requirements is to have a social insurance number, which you have if you are a Canadian citizen most of the times. So you can ask around in your family if you're not sure. And if you are 18, you can go ahead and create one for yourself. Or if you are not yet 18, you can remind your parents or your family that you need one when you are 18 years old because you don't want to pay those extra taxes if you don't have to.

Second off, what is an RRSP? It is a Registered Retirement Savings Plan. Retirement, really? I'm too young to think about retirement. Not so quick. When do you actually want to start thinking about retirement? Think of a number in your head right now. I'll give you the answer in 3 seconds. The answer is, no matter how old you are, right now. You want to start as soon as possible. Why? Because we saw an episode to the importance of compound interest, how important it is to start as soon as possible because small sums can be transformed into very big sums if you start off early.

So, let's go back to the initial situation we had where you have your money. A little bit of it goes to you. A little bit of it goes to the government, right? Well, the money you put in an RRSP is not taxed from your salary. So if I earn $10 and I decide to place it into an RRSP, I don't pay taxes. The little $5 here, no. That's not what happens. I get the full $10.

So how does an RRSP work? Well, technically you are paying taxes on the money. However, if I put $5 into my RRSP, the government is simply going to add another $5 to go, OK, well, we're paying back the taxes that you paid initially. So that's called a tax refund. Next up, tax-free gains. So you're going to grow the money in your account if you are smart with your investments. And the growth you're going to earn is not going to be taxed, whereas if it's outside of a TFSA, outside of an RRSP, you are taxed on the gains you make.

However, you are taxed at some point in an RRSP. And it is when you withdraw the money from the account. So when the money is in the RRSP, I can't use it. I can only invest it. And when I take it out to use it, that's when it's taxed. And that's why you want to use it for your retirement. Because when you're retired, well, you don't have a salary. You don't pay taxes. Therefore, you can take the money out and pay less taxes on it because the more money you make, the more taxes you pay, so you transform your salary into whatever you withdraw from your RRSP.

That's what you want to do to be smart with your investments. So to answer question number 3, why do I need these two things? Why is an RRSP important? Why is a TFSA important? It's quite simple, because you want to avoid paying taxes when you don't have to. You get to keep your own money and reinvest it, and use the power of compound interest in order to have a happy and early retirement.

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Hi, everyone. My name is Francis Lufty, and I'm Di Iorio Wealth Management's summer intern, here to talk to you about one of the most powerful wealth tools you will ever come across, and that is compound interest. So let's start off by defining, what is compound interest? Two very obscure words. Let's start off with the second one, interest. So what is interes? It's a little extra that you pay when you borrow.

For example, if I borrow $10 from you, I'm going to give you the $10 back, obviously, but I'm also going to pay a little extra. And that little extra is going to be called interest, often expressed in terms of percentage. And as an investor, you can also earn money from interest. When you deposit $10 in your bank account, the bank is going to give you a small percentage back, too, because you're technically lending that money to the bank.

So I deposit my $10 in my bank account. Bank is going to give me a small percentage of that $10. And it's going to be expressed in forms of coins. That's how we're going to use it to express what is compound interest. So a year later, you're going to still have your $10, but you're also going to have that little coin balance that we said, the interest.

And now the most interesting part, what is compound interest? Compound interest is when you take that little stack of coins and you reinvest it to earn a second stack of coins. And then that two stack of coins is going to become three, and those three stack of coins is going to become four stack of coins. And eventually, you're going to end up with another $10. You'll have doubled your money, because of the interest you reinvested, and you made interest on that--

And that is the expression that many people use. They define compound interest as interest on interest. That means you make money with the little stack of coins that you've already gotten.

And maybe this hasn't convinced you how important compound interest is. Now let me show you something that's pretty interesting. So let's start off with $1,000. You have $1,000, you are 12 years old, and you invest it. And every year, you get a 10% return, but compound interest. So the 10% that you earn, you invest it again. And you earn a 10% on that, and et cetera, et cetera, like we demonstrated with the little coin stack.

So as you can see here, $1,000 at 12 years old. And then you can see the amount that you have after every year. Well, wait a second. It gets crazier. If you go until age 67, we can see all of the amounts here. Well, what is going to happen? You started off at 12 years old with $1,000 and you end up at 67 with over $189,000. So you can see, 1,000 to 189,000, all thanks to compound interest. You didn't invest any extra money. You just made 10% every year and reinvested the interest you made.

And now you might say, oh, this is awesome. But I'll just start investing later. No. That's when I get angry at you, and I tell you, do not do that. Why? Because let's say you started at age 25. So boom, all of the little squares are gone and we start at 25 with the $1,000. We make 10%. So nothing changes, except the fact that instead of 12 years old, you start at 25. Well, what happens? Your balance goes way down.

You go from $1,000 to not 189,000, but only 54,000. So you get almost a quarter of what you would have gotten if you had started earlier. So lesson number one, start investing early.

Or you can say, eh, I'll buy something else with that money. I have $1,000. I want to buy an iPad. I want to buy a new iPhone. Well, once again, I get angry at you and I say, do not do that. Why? You go from $189,000 to only $94,000, so about half of what you would normally get. Well, you decided to spend $500 on a new iPhone, and that cost you $50,000 on the long run.

So what are the three key takeaways from this presentation, the three rules that you need to follow for the rest of your life in terms of investing? Well, number one, invest. You can't profit from compound interest if you don't invest. Number two, invest now. Invest as soon as possible when you have the funds available. We saw the difference between 12 and 25. It's huge. So you really want to start as soon as possible.

And rule number three, not only do you want to invest now, you want to invest as much as possible. We saw the difference. That $500 iPhone ended up costing you a lot more than that on the long run. So you want to invest now and as soon as possible, and you should be good to start investing.

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The first concepts that I learned that were very important to my understanding of investment were, what is a stock? How do they work? What is a share? Why do you buy those things? Well, all these questions are going to be answered in this video.

So let's start off with a cheese pizza. I know it's weird, but we are going to be comparing the pizza world with the investment world throughout this video. And believe it or not, cheese pizzas and companies have a lot of things in common.

So let's name our cheese pizza after a company name. We are going to name that company Apple. And I'm sure you know of that company, because they make all those tools you use on the daily, for example, the iPhone, the iPad, the MacBook. All those things are made by a company called Apple.

And Apple, just like a pizza, divides itself into slices. So what we're going to call a slice of pizza in the pizza world, we are going to call a share of a company in the investment world. OK, I get it. But what is a share, and why do you own these things?

Well, why do you buy a share? Because when you buy a share of a company, you become a part owner of that company. So there are many, many shares for the company Apple. So when you buy a share of Apple, you are the owner of a very small part of every iPhone, every iPad, every MacBook out there.

Same thing goes for other companies, let's say, Netflix or Disney. Well, these companies, you become a small owner of Disneyland, of every Disney movie. Or for Netflix, you become a small part owner of every movie and TV series that the company makes.

OK, I get it. But you can eat a pizza. You can't eat a share. What else can I do with the share? Well, I can sell it. So I can start with a little bit of money and end up with a lot of money, thanks to buying shares. How? Well, how does the value of a share increase when its popularity increases?

So with the example of Apple, you have $10, and you offer it to Apple in exchange for a small part of the company, a share. That's the little yellow thing over there. And then, a year later, the company Apple becomes way more popular. It sells double the amount of iPads, triple the amount of MacBooks. And what happens? Its share price is going to go up because it's more popular, as I said before.

So now I can offer my share for $20. So what happened? What is the end result? Well, I started with $10, and I ended with $20. And that's how people make money in the stock market.

However, you have to be careful. Because as much as a company's share price can go up from $10 to $20, it can also go down from $10 to $5. For example, Apple sells half of the iPads it sold last year, a quarter of the MacBooks, and a third of the iPhones. Well, then it's less popular, so its share price can go down.

So as much as you can make money on the stock market, you could lose money on the stock market. And that's why you want to be intelligent in your investments.

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