So, you’ve been watching BNN constantly and you think you’re ready to start investing your hard-earned money in penny stocks and IPOs? Do you have an updated Will and proper insurance coverage? Have you started an RRSP? Are you struggling with credit card payments? Is the answer no? Then forget it!
Before undertaking any financial venture, you must have a good strong base from which to work to successfully reach the goals and objectives that you’ve set.
One tool that I came across while I was taking the Canadian Securities Course (CSC) that will help clarify your current situation and identify planning needs is the “financial planning pyramid”. Although the financial planning pyramid may appear simplistic, I can attest that is it a useful visual aid and used by many financial advisors. The financial planning pyramid helps to visualize your long-term goals and objectives and review your overall investment strategy.
(Source: CSI Global Education Inc., Canadian Securities Course. Vol.2. 2010. ch.26., p.11. Print/eBook.)
The remainder of this post will look at the foundation of the pyramid – “Security” and “Independence
The very bottom of the pyramid looks at protecting those closest to you from unavoidable risks (death, sickness, accidents, job loss, etc.) of which you can normally cover with insurance policies and wills. When it comes to insurance, I am not an expert and likely not too many of you are either. In which case, it might be prudent to find yourself a reliable insurance broker that will help you get the best insurance policies at the best possible price.
At the next level, you should identify the debts you now have or those which you are assuming day by day. For these your plan should include the reduction of these debts if they are now, or likely to be a problem in the future. Personally, I believe that any debts that you have that are on items that depreciate (i.e. car loans, consumer products, etc.) should be considered “bad debt”, while anything debts on appreciating items (i.e. a house or an education) is a “good debt”.
Next, you should start a Registered Retirement Savings Plan, or RRSP. What is an RRSP plan, you ask? RRSP is a personal savings plan that is registered with the Canada Revenue Agency which allows you tax shelter your investments. Any growth within your RRSP plan is tax deferred, not taxed until withdrawn, at which point it is taxed as an income.
RRSP was put in place to encourage Canadians to save for their retirement and lessen the burden on the government when Canadians retire. The idea is that throughout your working years you save a portion of your income in the RRSP plan and upon retirement you start withdrawing from it to supplement your CPP and OAS income. This is probably going to be more important now that the Federal Government has now proposed as part of their budget to increase the age of eligibility from 65 to 67 years old.
Any contribution you make to your RRSP account is tax deductible, you will get a tax refund based on your marginal tax rate. Generally your tax bracket would be lower after retirement, so you would be paying less tax while growing it tax free.
You should note that in your RRSP account you can hold variety of investments, such as a savings account, GIC’s, mutual funds, bonds, equities, gold or silver bullion and many more. However, I would advise you to place interest bearing investments into your RRSP account as it is more tax efficient since it will be tax deferred and place dividend stocks in your non-registered account where you can benefit from the dividend tax credit.
Finally, you should establish an “emergency fund” of cash in a high interest savings account or some other liquid investment (i.e. Canada Savings Bonds) which will address the risk of loosing your job or some other unforeseen circumstance. This should typically cover at a MINIMUM at least three months of your current wages.
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