Feeling ready to start investing? It’s a good idea to ask yourself a few key questions before diving in. Check in on your overall financial readiness, investing goals, time horizon and risk tolerance level.
On this page you’ll find
Why should you check your financial picture before you invest?
Investing can help you reach your financial goals. The sooner you start, the more time you will have to let compound interest work in your favour. And with more time you’ll be able to navigate the ups and downs of the market with greater flexibility.
However, make sure your finances are investing ready first. Before you get started, consider:
- Your monthly cash flow. Better yet have a budget. It helps to know how much money you have available each month to put towards saving and investing. Your budget can help you figure out where your money is going, and whether there are places you can trim expenses to find more money to save.
- How much you owe. If you have high interest debt, for example credit card debt, it will likely accumulate more interest in the short term than any investing gains. Make a strategy to pay down debt before investing.
- How much risk you can tolerate. The risk-return relationship is important for any investor. Generally, the higher the potential return of an investment, the higher the risk. But there is no guarantee that you will get a higher return by accepting more risk. Risk tolerance is personal, so it’s good to know yours before you commit to an investment.
What should you consider when you’re ready to start investing?
Starting to invest isn’t just about how much money you have available. There are a few other things you should think about including:
- What you’re investing for. Having a clear goal in mind can help you decide how much you’ll need to save, when you’ll need it, and what type of account to put it in. There may be a registered savings plan account that can help you.
- Whether you’ll need access to your money. Cash and bank accounts are very liquid. That means it’s fairly easy to get your money out when you need it. Investments tend to be less liquid than bank accounts. Investments also tend to offer a higher potential return, but also may come with more risk. Consider different investments for different time horizons, and make sure your emergency fund can cover sudden expenses if needed.
- What kind of investing help you might need. Getting advice can take many forms. Consider the different types of advisors and whether one might meet your needs. If you decide to use an online adviser, understand how that differs from an in-person advisor relationship.
To understand how investments can rise or fall in value, learn more about how the stock market works.
What types of investing accounts are there?
There is more than one way to open an investing account. The type of account — or accounts — you hold will depend on your goals.
Registered savings plans
In Canada there are several types of registered accounts that can hold different types of investments as well as savings deposits. These accounts can also help you save for specific goals. These are:
- Registered Education Savings Plan (RESP) – for saving for your child’s post-secondary education
- Registered Retirement Savings Plan (RRSP) – for saving for your retirement
- Registered Disability Savings Plan (RDSP) – for people living with disabilities
One thing these accounts have in common is that they are tax-sheltered. This means your savings will grow tax free while the money stays in these accounts — but it will be taxable when it is withdrawn.
A Tax Free Savings Account (TFSA) is an account that can be used for both saving and investing, for any type of goal. Withdrawals from a TFSA are not taxed.
RESPs, RRSPs, RDSPs and TFSAs can hold different types of investments, such as Guaranteed Investment Certificates (GICs), mutual funds, or Exchange-Traded Funds (ETFs). Not all types of investments can be held in registered accounts. Learn more about different investment types.
Investment account with a broker or advisor
If you want to invest in stocks, you will need to open an account with an investment firm. This can take the form of a cash account (where you pay with cash) or a margin account (where you borrow to invest). Investments bought on the margin cannot be held in a registered account. Learn more about buying and selling stocks.
You can open investing accounts and manage your portfolio with the help of an advisor. Working with an advisor in person can offer personalized support to manage your goals. You can also open an investing account online using an online advisor. Online advisors will ask you questions to understand your situation and goals.
There are differences in the kind of products and services available when working with advisors in person or online. Learn more about the differences between online advisors and traditional advisors.
What fees and tax implications are there for investing?
Investment accounts and products may carry some fees, as part of the transaction. You may also pay fees to sell investments. Common fees include mutual fund fees, ETF fees, RRSP fees and RRIF fees.
Make sure to review your account information and track your investment costs on a regular basis. Assess the impact of fees when choosing an investment and be aware that fees can differ between products and companies.
Also be aware of tax implications for your investments. If your investments are held in one of the registered savings plans (see above), you may not pay taxes on the investments until the funds are withdrawn.
If you hold your investments in a non-registered account, it’s likely you’ll pay tax on your investment income. This will depend on the type of investment, the tax laws where you live, and your overall income. Learn more about investors and tax.
What does it mean to check before you invest?
Checking registration helps protect you from unqualified or fraudulent individuals. Before you buy a new investment, check before you invest. Make sure the investment dealer is registered and qualified to sell you the investment you are considering.
Watch out for the key signs of investment fraud. For example, if an investment promises high returns with little or no risk, chances are it is too good to be true. Don’t feel pressured to buy if the investment is not right for you.
Summary
Follow these key steps to get started with investing:
- Check your financial picture before you invest. Know your cash flow, budget, and how much debt you have.
- Know what you’re investing for, and when you’ll need the money.
- Know how much risk you’re willing to take on.
- Know what kind of help you may need from an advisor.
- Consider whether to hold your investments in a registered account, or in a non-registered investment account.
- Check the fees associated with the investment before you buy, and keep up to date on your account information.
- Know the tax implications for the investments you choose.
- Check your advisor’s registration before you invest.
- Watch out for signs of investment fraud.
