Bob has never saved. He's not reckless. He's an artist—painters, actors, musicians, etc. who don't make a lot of money. I know where Bob is coming from, because I'm a business journalist and filmmaker. So, here I share the advice I gave him. But I reminded him that I'm not a licensed investment advisor. I know what I know from my own investing experience and from talking to the pros. (Further disclosure: I don't work for any company I recommend below.)
The good news: Bob carries no debts, not even on his credit card, and doesn't pay a mortgage or child support or alimony. But if you have serious credit card debt, then stop reading this and pay it off now. Pay your debts before investing a penny. Credit cards cost you 20% annual interest. Good luck making 20% in a stock.
What if I have a mortgage? If you have a bit of cash left after your regular payments, read on.
Back to Bob: How do I invest?
TFSA is your salad bowl
Put it in a TFSA.
Whatever profit you earn in a Tax-Free Savings Account, you keep. The taxman doesn't get a dime. Think of a TFSA as a salad bowl. You can toss a GIC, savings account, stocks and/or bonds into it. Each year, you can contribute up to $5,500. Like an RRSP, if you don't contribute the maximum, you carry over the remainder into next year. So, if in 2017 you put in only $3,000, then in 2018 you can add another $2,500 plus $5,500. Get it?
If you've never contributed anything, then your total contribution room is $57,500. So, if you win the lottery, you can stuff $57.5K into your TFSA. If you don't know what your limit is, then contact the Canada Revenue Agency for free. Remember that any cash you withdraw from a TFSA lowers your contribution limit that year. So, if you take out $1,000 to buy a fur sink, then you can contribute only $4,500 that year. Just don't go over your limit, or else CRA will nail you with interest charges that would make a loan shark blush.
Great, says Bob, now how do I get a TFSA?
Call your bank and open one. You'll probably need to visit your branch for a brief sit-down and sign a few things. No big deal. Just don't buy anything from them, like a mutual fund or e-fund. Banks charge fees for this stuff. That's how they make their money,
Whaddya mean? asks Bob.
Keep reading.
What do I invest in my TFSA?
Key word here is invest. You can open a savings account or buy a GIC, but you'd earn maybe, just maybe, 2% over a year. Well, inflation is also 2%, so do the math.
To beat inflation, buy stocks.
Wait a damn minute, says Bob. Stocks go up and down. I don't know what to buy and don't have time to study them. Why don't I just hire a money guy instead?
Good luck. If Bob has only $5K to invest, no money guy/girl (aka investment advisor) will return your call. They charge 1.5-2% of your total portfolio, so would they go to the trouble of earning $75 off you?
Instead, be your own Money Guy and buy ETFs.
ETF FAQ
An exchange traded fund is another kind of salad bowl. An ETF collects a bunch of stocks into one bowl. You buy and sell units of that bowl. That bowl is traded on the stock exchange like a stock. Your bowl could focus on one sector, like Canadian oil (XEG is the ticker symbol on the Toronto Stock Exchange); or a country, such as XIC (covering the entire Toronto Stock Exchange).
Sounds like a mutual fund, says Bob. Yeah, sort of, but the huge difference is the fee (aka MER for management expense ratio). The average Canadian mutual fund charges 2.35%. So, if your mutual fund earns a 6% profit, you walk away with only 3.65%. And remember inflation? Ouch.
However, an ETF charges a fraction of these fees. XIC's MER is 0.06%. That's it. And it pays a 2.48% yield, which is a thank-you they pay you for holding the ETF. So, if you bought $1,000 worth of XIC, you'd pay $6 a year, but receive $24.80 back, which means you're ahead $18.80. Other ETFs charge in the same ballpark.
Let's say you bought that $1,000 XIC at $10 per unit (100 shares) in your TFSA. You now have $4,500 left in your contribution room for that year (plus whatever leftover space from past years). Fast-forward a year: XIC now fetches $11.25. You sell your 100 units and walk away with $1,125. Congrats! You just pocketed a $125 profit. Add to that the $18.80. That's a 14% profit in one year. Compare that to a 2% GIC.
Remember: You keep that $143.80. The taxman doesn't touch it. And you don't pay a cut to any Money Guy/Gal, just the 0.06% MER.
Great, huh? Yeah, says Bob, but what if XIC goes down?
Wait.
If XIC falls below $10, then just hold it until it rises. Don't give in to fear and sell. Don't panic. Play videogames. Hit the gym. Whatever. Go away for a while and don't look at XIC. Stand firm during the selling stampede. Remember: the Toronto Stock Exchange recovers after every drop, even the Great Recession of 2008-9 where stocks plunged 40-50%. It make take a few months or few years, but patience pays. I know, because I held XIC over that brutal time period.
Okay, I see, says Bob, but are ETFs the only safe bet? Can I buy something else under my TFSA?
Well, you can purchase stocks like a Canadian bank, but that discussion's for another day...
