In my previous posts I’ve written about putting money away first, using your TFSA account, diversifying your portfolio and what to look out for in mutual funds. It’s great to get the knowledge, but it’s what you do with it that matters. If you have started making a monthly budget and setting aside a bit of money to save, then I congratulate you. You are probably better off than the average Canadian who owes over 164% of their annual income. It’s staggering to find out that many Canadians are struggling to make ends meet and that they are living paycheque to paycheque, but yet still using their credit cards to increase their standard of living.
If you have learned anything in the past few posts, it’s that there are a lot of ways to generate income from your money. This is called generating a passive income. What this means is that even though you are working your regular 8 hour day, there is something else that will make money for you even when it’s not you doing it. The idea behind building wealth is letting your money do the work for you. Regardless of whether you are on a vacation, sick in bed or out of a job, there is always another source of income that is generated from your money. Think of a money tree. Wouldn’t we all love to have one of those growing in our backyard?
The purpose of saving every month is to enable you to have money to invest. This coincides with the term “the rich get richer” or perhaps the saying “it takes money to make money”. The idea is to invest your money in income generating investment vehicles. The biggest mistake that you can make is just letting your money sit in a savings account.. That would only benefit the bank because they will just take your deposit and lend it to someone else at a higher interest rate.
If you budgeted correctly and you have achieved a positive monthly cash flow position, it’s time to put that money to work! The first task is to take that money you are saving and move it from a savings account to a brokerage account. You should be opening a brokerage account with your local financial institution if you are serious about making a passive income. Leaving your money in a savings account or buying GICs is not a smart way to preserve the value of your money. The evilness of a concept called inflation will eat away at the value of your money over time. You need something that will generate a return higher than inflation and the interest from a savings account will not do that.
The best way to have a brokerage account is to make it a TFSA brokerage account. Yes, that’s right, a TFSA can be a brokerage account. Don’t let the banks trick you and tell you your TFSA should be a savings account. That’s just a waste. If you already have a TFSA savings account, then open a brokerage account and tell them to transfer all your assets from your TFSA savings account to the new brokerage account. At the same time tell them to waive the fee, they’ll gladly do it because they want your money and your business. You have more leverage than you think!
So why do we need a brokerage account? A brokerage account let’s you invest your money into a variety of assets including: stocks, bonds, mutual funds, money market funds, GICs. The goal is to diversify you savings with the many choices that are available to you. A great way to achieve diversity is to look at purchasing mutual funds. Find a mutual fund that has low management fees, agrees with your risk tolerance and provides you with a good return on your investment. Remember, not all mutual funds are the same and some are great investments with very low cost of ownership. The reason why mutual funds are preferred for investors who are just starting their portfolio is that they carry no transaction fee when buying or selling. If you are buying individual stocks or bonds, commission fees from your brokerage account would far outstrip the costs associated with the management expense ratio. Stick to low cost mutual funds and you’ll find yourself ahead of the game.
So remember that monthly amount that you are saving? Have that go directly into your TFSA on a monthly basis and purchase your mutual funds. Better yet, have the financial institution do it automatically for you. You can have the financial institution setup a pre-authorized contribution to your TFSA. Just make sure your monthly contributions don’t add up to over the $5500 limit for the year. Once you have this all in place, you will no longer have to manage your investments on a monthly basis.
If you have accomplished everything described above already, then hats off to you. You’re probably in the minority of individuals who are actually putting their money to work for them. Stick to the plan. Stay patient and let it grow. As the saying goes “Good things come to those who wait.”