Saving and investing

So far in this series, we’ve talked about the basics of budgeting and of borrowing. Now it’s time to discuss saving and investing. Here, as usual, the government has both blessed and cursed us with their complex programs. Canada’s charities program is in my view a world-class piece in our tax regime. Once you give more than $200 per year, amounts above that get you a tax rebate in the neighbourhood of 45 percent, depending on which province you live in. Canadians may give up to 75 percent of their annual net income away to charities to qualify for tax receipts. “God loves a cheerful giver”! (2 Cor: 7). As Christians, we can support those charities that we hold dear.

Investing has also been complicated by our tax regime. That regime has three programs that have a significant impact on investing. Let us look at them briefly.

Registered Retirement Savings Plan 

Saving for retirement is a big deal and the tax system rewards the savings term of the program, but when you are ready to use it taxes it back (historically taxes have increased) at possibly a higher rate. The majority of working Canadians are in the Canada Pension Plan and pay premiums along with their employers. This, along with Old Age Security, provide a basic income when retired. The average income earner will want to supplement that pension with a RIF (the name of the RRSP once you are forced to draw it down).

Tax Free Savings Account 

This is a more recent program that allows individuals at age 19 and older to set aside $6,000 per year in a savings vehicle that is not taxable. The cumulative current limit for someone who has never contributed to a TFSA and was old enough to have one since its inception will have a contribution room of $75,500 as of Jan. 1, 2021. 

Registered Education Savings Plan

You can contribute to a RESP for up to 31 years, and the plan can remain open for a maximum of 35 years. The government matches 20 percent on the first $2,500 contributed annually to a RESP, to a maximum of $500 per beneficiary per year. The lifetime maximum per beneficiary is $7,200, up to age 18.

The complexity comes because you need to have individual accounts for RRSP and TFSA, but you can have a family account for RESP. The account options range from a simple savings accounts to full or self-managed brokerage accounts. 

Savings accounts

Savings accounts are the simplest option but at rates ranging from possibly negative to about 2 percent. Eligible deposits are automatically covered to a limit of $100,000 per insured category at each CDIC member financial institution. Members include banks, federally regulated credit unions, as well as loan and trust companies and associations governed by the Cooperative Credit Associations Act that take deposits. Some provinces have their own program that include a 100 percent guarantee.

Mutual funds and more

Full brokerage accounts and mutual fund accounts are professionally managed. These are attractive to those who do not wish to get involved in money management but attract fees ranging from 2 percent to 3.5 percent annually. For those so inclined and just starting out, the mutual fund method would be the best alternative. These accounts can be set up with your local financial institutions. Here there are no guarantees, but the sellers of these accounts are under fiduciary obligations to “know your client.” This is achieved by a thorough form assessing a client’s risk tolerance.

Self managed brokerage accounts are becoming more popular. This is due to the easy access of research on economics and actual companies. Financial institutions offering these accounts are many and the information available is virtually endless. But so are the warnings on risk. 

The good news is there are many financial courses available online or from local universities. Also books on the subject are many and I have referred to one in an earlier article (The Wealthy Barber by David Chilton). If you start early enough, learning by experience is great but you may incur a few losses along the way. The self investing sites I am familiar with do provide lots of information and simple methods to get started.

Investments

My own experience started when the company I worked for offered a plan to purchase their shares. For every dollar I put in they would match 50 cents. The maximum was six percent of your salary. It was, at that time, a “no brainer.” Within one or two raises the six percent was covered and I never noticed the deduction after that. But the shares kept growing.

If you are good at what you do in your own business and have some confidence, then the best place to invest your money is your own company. If you work for a company and you like your work and what the company does, ask if you can take part of your pay in shares! Having worked in an agricultural area of the country, I always urged my farmer clients to invest in their own farms (assuming of course they loved the work and the long hours).

Another way to look at investments is to look at your own lifestyle and what products you consume. Let us start at the basics. We all use electricity (in fact it is in vogue today) so maybe we should look at companies that are active in that area. But beware – not all are successful.

I suspect that anyone reading this will own a cell phone. What companies make them? To whom do you pay your monthly phone bill? Some good success stories in that field. Forty years ago, a big expense for us was gasoline and heating our home. There is still a lot of need for those products and lots of companies that thrive in that area. But beware – not all are successful.

Fees and dividends

As mentioned above when I first started, I was involved in mutual funds. When these companies were required to report their top ten holdings, I looked at which companies my mutual funds were investing in. Sure enough, all names I was familiar with. I was paying 2 percent of my capital every year in fees. 

To put this in perspective, if you hold $10,000 in mutual funds you are paying someone else $200 per year to manage that for you. Buying five of the top holdings in the mutual fund yourself would cost about $50 one time. Not every year.

Once I got that far I started looking at 10 different mutual funds (because I liked dividends (the amount companies pay shareholders) I looked at Dividend mutual funds. Of the 10 funds I looked at, the same 7 names of the top ten showed up. Surely those 10 managers of those funds could not be that wrong. So, I bought shares in 7 more companies which cost me $70 one time. 

Every year I check different funds to check the names of their top ten holdings and compare that to my own holdings. Over the years I have expanded to funds investing in the USA and in Europe. 

The self managed brokerages in Canada all provide easy access to the data needed. Over time when your account reaches $100,000 and the 2 percent would cost you $2,000 so that the 40 hours per year spent managing this is worth $50 an hour. But beware – the stock market goes up and goes down. I have lived through six big downturns: 1973, 1987, 1997, 2002, 2008, 2020. In every case the stock market rebounded.

One concluding comment. Do not try and time the market. In a sense, the stock market can become a place to gamble. And, like drinking alcohol, it can become addictive. The idea is to start early in life. The value of a five-days-a-week, Starbuck’s fancy coffee, $6, over a period of 40 years @ 4% is an opportunity lost to invest $153,654.97! That’s known as the time value of money!

Part one and part two of the series.