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Get the future you want: Make a financial plan – Part 5: Investments

In the previous article of this series, Part 4, we looked at strategies for saving. We discovered that there are two types of savers – one is definitely more strategic than the other! We also studied the all-important topic of budgeting, and finding a way of budgeting that suits you best. In this fifth article, we examine how investing now pays off in a permanent income later.

 

Invest in your future

To make strides in today’s society, we need to be able to rely on more than our salaries. To be sure, we can work for money during many hours of the week. But we also need to have money working for us – all hours of the week, 24/7, even while we are sleeping.

We need investments.

There are two types of income: temporary and permanent. Salary is our temporary income. Since we aren’t going to work forever, we need the second type: the permanent income generated from our investments.

It’s never too soon to start putting money into investments. To project what kind of yield you can expect, consider the Rule of 72. The Rule of 72 is a simplified formula for figuring out how long you will have to wait for an investment to double, given a fixed interest rate. Divide 72 by the annual rate of return, and you’ll get an estimate of how many years before your initial investment doubles.

Borrowing an example from Investopedia, “$1 invested at 10% would take 7.2 years (72/10) to turn into $2.” Again, the Rule of 72 is just an estimate, and a rough one, at that. But you get the idea. By investing now, you keep building for later.

 

Types of Investments

These can include:

• stocks
• bonds
• GICs (Guaranteed Investment Certificates)
• mutual funds
• ETFs (Exchange-Traded Funds)
• real estate
• rental property.

Which options from the above list work best for you? It depends on your tolerance for investment risk – this is something you can discuss with your financial advisor.

 

Seek an advisor’s wisdom!

With all investments, we advise diversifying. Don’t put all your eggs in one basket. Diversifying lowers the overall risk of your portfolio.

We also advise approaching investments without emotion and bias. That’s harder to do than you might think. Our emotions, experiences and surroundings affect our attitudes to investment decisions. A person may incline toward a decision that feels good but isn’t in fact very practical for them. Using emotion rather than reasoned deliberation is all-too-human a failing.

That’s where professional financial advice is so vital. An advisor takes the emotion out of investing. An advisor uses evidence-based strategies, not emotions.

So remember: Salary is temporary. Investment income is permanent. Consider which investments are right for you – ask an advisor!

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In Part 6, the conclusion of this series, we’ll discover how tax deferrals can work to increase your wealth. Yes, we all have to pay taxes. But the government encourages us to defer some of those taxes through such vehicles as Registered Retirement Savings Plans (RRSPs) and Registered Education Savings Plans (RESPs), to name just two. You won’t want to miss the next and final article, because: Pssst!: It’s not how much you make, but how much you keep.