https://www.youtube.com/watch?v=CMQLdJa64Wk
When you save money for later use, you are saving the surplus wealth you have created by your work. Unless you are putting gold bars under your bed, you are investing. If you put it in a bank, the bank will loan it to someone who wants to buy a house or a car and usually will pay you a small amount of interest.
This is the safest way to save as bank deposits are insured, so your money is safe even if the bank disappears. But as of 2022 the interest rate is less than the rate of inflation and it will be added to taxable income so after tax and inflation your savings will be slowly falling in value. See the next chapter for other ways to invest.
Bonds are typically regarded as a safe way to invest but current interest rates are so low that bonds are declining in value at the rate of inflation and the yield is still taxable although there may be a capital tax loss.
But most long term savers generally buy shares of publicly traded companies. These often pay dividends and tend to increase in value with the rate of inflation but dividends and capital gains (when stocks are sold) are taxable; typically at lower rates than interest income. This is now very easy and it is not as risky as most people think.
Many stocks prices do not fluctuate significantly and many pay a dividend monthly, or every three months, which is more than bank interest.
(In Canada, dividends paid by Canadian companies are taxed at a lower rate than interest payments. Only half of capital gains minus capital losses are taxed in Canada and this tax is less in the USA).
You can minimize the risk by diversifying. Exchange traded funds (ETF's) typically own many different companies so if one of them does badly the ETF does not suffer unduly. Or, you can choose companies that have a steady business. Telephone companies and banks are relatively safe as are other regulated utilities such as natural gas and electricity suppliers. If you buy shares (stocks) of a company, you are a part owner and benefit from any dividend paid, or any increase in the value of the share (this is a capital gain).
You can invest either by buying a passive investment like a mutual fund or an exchange traded fund (ETF) both of which reinvest your money in a number of different stocks thereby reducing the price volatility (if one of the stocks falls in price the others may not, or may increase). ETF's are increasingly popular as they are invariable cheaper in management costs and can be bought, tracked and sold on stock markets very quickly.
If you have little or no investing experience, look for managed funds with a good return and a low management expense ratio (ETF's are cheaper to own than mutual funds), but with a modest amount of research you might like to set up a self directed trading account and start by buying an Exchange Traded Fund (ETF) directly. There are hundreds of these many owning stocks in particular industries such as technology, banking, mining or energy. Others may have special objectives like high yield or dividend funds. These are not actively managed and therefore typically have lower management fees than managed funds.
Examples of ETF's are;-
QQQ (40% of which is invested technology companies like Apple and Microsoft),
SPY is the symbol for the ETF based on the S&P 500 of large-cap U.S. stocks.
XIU is the symbol for the ETF based on the Toronto Stock Exchange index of Canada's top 60 companies.
You can look these up without charge on;-
https://bigcharts.marketwatch.com (For Canadian stocks put CA: in front of the ticker symbol).
https://ca.finance.yahoo.com(For Canadian stocks put .TO after the ticker symbol).
https://stockcharts.com(For Canadian stocks put .TO after the ticker symbol).
Some brokers, like Questrade (https://www.questrade.com/home),
offer funds that contain several ETF's based on your risk tolerance. You may chose funds that are low risk; these typically grow slowly and offer relative high dividends or you may choose high return funds that have a higher price volatility, lower or no dividends, and are riskier. Or you may buy both.
You can buy any number of shares in a particular company but diversification lowers risk so it makes sense to buy a small amount of a number of different companies. Most experienced investors have less than 15 to 30 different companies in 5 to 10 different sectors like banking, technology, energy, mining, retail, real-estate, construction, health care etc.
If you do not have a lot of money you might put most of it into a general ETF and use a little money to experiment until you develop experience. Too get rich slowly requires that you save a regular amount of your income and re-invest all interest, dividends and capital gains. This is known as compounding. As a rule of thumb an annual return (yield) of 8% will double your money every ten years. This is the power of compounding. So if you put $1000 into a fund that is providing 8% yield, when you are 20 years old, how much will you have at 60? That is four doublings or $16000 or 16 times your one time investment of $1000. Not exactly a get rich quick scheme, but the trick is to get rich slowly.
An average return of 8% is possible (including dividends, interest and capital gain) with reasonably conservative investments but keep in mind that this may vary from year to year. Your investment may decline sharply from time to time, possibly a loss of 15% in one year may be offset by a gain of 40% in another. (For simplicity, this ignores taxation which varies with each individual).
What happens if you put $1000 every year into a tax free savings account with a fixed return of 8% per year.
At the end of year 1 you will have $1000 x 1.08 = $1080 and you add another $1000 making the total $2080.
1. 1080 + 1000 = 2080
2. 2080 x 1.08 = 2246 + 1000 = 3246
3. 3246 x 1.08 = 3506 + 1000 = 4506
4. 4506 x 1.08 = 4866 + 1000 = 5866
5. 5866 x 1.08 = 6335 + 1000 = 7335
6. 7335 x 1.08 = 7922 + 1000 = 8922
7. 8922 x 1.08 = 9636 + 1000 = 10636
8. 10636 x 1.08 = 11486 + 1000 = 12486
9. 12486 x 1.08 = 13486 + 1000 = 14486
10. 14486 x 1.08 = 15644 + 1000 = 16644
11. 16644 x 1.08 = 17964 + 1000 = 18964
12. 18964 x 1.08 = 20481 + 1000 = 21481
13. 21481 x 1.08 = 22119 + 1000 = 23119
14. 23119 x 1.08 = 23889 + 1000 = 24889
15. 24889 x 1.08 = 26880 + 1000 = 27880
16. 27880 x 1.08 = 30110 + 1000 = 31110
17. 31110 x 1.08 = 33599 + 1000 = 34599
18. 34599 x 1.08 = 37367 + 1000 = 38367
19. 38367 x 1.08 = 41436 + 1000 = 42436
20. 42436 x 1.08 = 45831 + 1000 = 46831
After 20 years you will have contributed $20,000 and the fund will have a total return of $26,831. If you stopped making annual contributions the fund total at year 30 would be about $93,600 and by year 40 about $187,200 while your contribution would be $20,000 and return $167,200 (8.37 times your investment of $20,000). But most people keep putting money into saving for an even bigger return.
YOU ARE READING
Wealth
Non-FictionBanking began in Florence, Venice and Genoa in the 14th century when Jews set up their benches in the piazzas to loan money and insure farmers crops. The ideas spread to Amsterdam and London, while the first stock exchange began in Amsterdam in 161...
