How to start investing can be challenging for many and there is seemingly so much information to know. It’s also a challenge to figure out who to trust – so many people want your money!
- How can you start investing?
- Should you buy: funds or individual stocks?
- What accounts should you start investing with?
Today’s post answers those questions and much more with references to our library of content and various links for how to start investing for beginners. Let’s get into it!
Just starting out – how to start investing
At Cashflows & Portfolios, we believe there is huge power in the power of “why”:
- Why do you want to have money?
- Why is money important to you or your family?
Answering these questions is at the heart of financial planning, which comes before investing.
Read on more about The Power of Why – why we believe answering some questions about your relationship with money is essential before you do anything with it.
Just starting out – where does my money go?
Now that you might have a better idea behind your money “whys”, we believe it’s important to document where does your money actually go. This is because we want you to have money, to invest money, to grow your money as we have.
To find your money, you should know that at the end of the day: Cash flow is King!
Your key to wealth building will be to essentially “grow the money gap” over time.
What’s the money gap?
The money gap is the space between your income and your expenses. This is where the process of cash flow planning and forecasting comes in. It’s about making sure you know what money is coming in, and when. It’s also just as important to know what money is coming out, when, and to whom.
For example, you might earn $5,000 per month after taxes. Your expenses might tally up to be $4,900 per month. You now have a positive money gap of $100 to save, spend more, or do other things with.
On the flip side, you can have a negative money gap number. If you earn $5,000 per month after taxes but you have expenses totalling $5,200, you have a negative gap number of $200. A negative gap number like this means you’re essentially overspending. You want your money gap number to be in the positive territory and grow over time.
A good reminder for beginners is:
Income after taxes – expenses = your money gap number
We believe managing the money gap and growing the money gap over time will deliver financial independence like the journeys we’ve been on.
How do you figure out the money gap?
Luckily, we have a free tool for that on our site!
How can you grow the money gap?
We’ll have many more posts on this site, including more case studies from others to link to, but for now, we feel there are a couple of key steps to consider.
- Consider reducing expenses – those include fixed costs, debt and variable costs you can track in your cashflow spreadsheet.
- Consider increasing your income – essentially you can make more money via your current job or take on a new, higher-paying job. There are also side-hustles, overtime work and other part-time jobs to consider.
Remember, you can alter each part of the money gap equation!
Income after taxes – expenses = your money gap number
The bottom line when it comes to the money gap, we want you to consider things like goal setting, itemizing your debt obligations, long before you invest.
Once you have your cash flow spreadsheet done – consider this next step in the playbook for how to start investing for beginners….
When Should I Start Investing?
The path to financial independence through investing is both simple but not always easy:
- Spend less than you earn (“live below your means”) – understand the money gap.
- Invest a percentage of money earned as part of a long-term plan.
- Consider diversifying your investments.
- Rinse and repeat steps #1-4.
- Staying the savings and investing course, not just for months, but years on end – manage the money gap.
- Avoid disrupting your investing plan at all costs.
- Keep reminding yourself about #1 and #2!
We know you’re keen to get investing but based on our experiences, we suggest you tackle these things instead of investing right away:
When Should I Start Investing?
So, now, whether you’ve managed to save your first few thousand or just decided it’s time to start saving beyond that link above, let’s really get into the nuts and bolts – how to start investing for beginners.
TFSA or RRSP – Which Account is Better to Start Investing With?
We believe, either way, you win! But, we do have a preference…
First, read up about these two (2) great investing accounts that most beginners should consider:
This one is:
Everything You Need to Know about the Tax-Free Savings Account (TFSA).
After you read that post, check out:
Everything You Need to Know about the Registered Retirement Savings Plan (RRSP).
Generally speaking, you’ll discover in those posts that an RRSP and a TFSA are mirror images of each other:
- TFSA = contribute with after-tax money, money grows inside the account tax-free.
- RRSP = you contribute with pre-tax money (or get a tax refund on your RRSP contribution), but you pay taxes on RRSP withdrawals/when money comes out of the account.
Given the RRSP-generated refund, what’s essential for all beginner investors to know is managing this refund well is essential to the RRSP debate.
My Own Advisor wrote about this in more detail here.
So, when it comes to the TFSA vs. RRSP debate unless you always (we mean always) reinvest the RRSP-generated tax refund back into your RRSP, then the TFSA could make more financial sense. We believe the TFSA should be your starting point for long-term investing – don’t let “savings” in the Tax-Free Savings Account name fool you. This account can help you help build significant wealth!
Who to start investing with?
Now that you understand your cash flow for investing, and you understand key accounts like TFSAs and RRSPs, the next logical question might be: who to start investing with?
Here are some popular options:
1. Using your local big bank
These institutions can help you set up a TFSA, RRSP or high-interest savings account as well. Be mindful that big bank advisors normally promote their costly mutual funds that belong to big bank’s families of funds. Those big bank funds charge higher fees than what you could own, more sensibly, to grow your money higher and faster.
You can certainly work with a big bank but we would prefer you consider starting to invest with the big bank brokerage’s arm to build a low-cost ETF portfolio.
For further reading: Investing in Index Funds.
(We’ll come back to indexing and why that matters in a bit!)
2. Using a discount brokerage
To buy your own ETFs, or individual stocks, or both, can be a great hands-on way to invest because you won’t be paying a money management fee to a financial advisor to invest for you. Mind you, the downside is, you’ll need to know what funds or stocks to buy on your own. Again, more on that soon!
Fans of this site, MoneySense, offer up an outstanding post every year sharing the Best online brokers in Canada to invest with. We encourage you to follow them every year for updates and news on this list.
3. Using a Robo-advisor
This option provides more guidance to any beginner investor for any investing approach since these are digital platforms that ask you questions about your investment risk tolerance, how much you want to invest, how often, and they essentially create an investment formula/recipe for you. Don’t worry, real humans work behind the scenes at these Robo-firms!
With any DIY investing route, that might seem very daunting out of the gate for a new investor, the great news is the robo-advisor does all the heavy lifting for you for an incremental fee over DIY investing.
You already know from reading our posts above, including this pillar article about The Four Keys to Investing Success, that the financial industry at large is a colossal machine designed to do one major thing: make money off you. So, best utilize a discount brokerage whereby you can invest for some of the lowest fees around and/or use a robo-advisor if you need some support. Using a robo-advisor can help you determine your tolerance for risk, and ensure you get your asset allocation (mix of stocks and bonds) in a zone you can stick to overtime.
Using a robo-advisor, whenever your investments start performing outside your specified risk zone, the humans monitoring your portfolio will re-balance your assets to get back to your pre-determined parameters. So, this is a great way to save, then invest, then automate your investment portfolio for a small fee that is typically far less than big bank funds but also slightly more expensive than any full-on DIY investing approach.
Our favourite discount brokerage is a partner with Cashflows & Portfolios
At Cashflows & Portfolios, one of the founders is still investing with Questrade after 20 years! – continually one of Canada’s leading/best-of online brokerages year after year. There are several reasons why we like Questrade: i) great mobile experience, ii) great customer service, and iii) commission-free ETF investing!
You can take advantage of our partnership with Questrade by opening an account: sign up with this link to receive a $50 trading credit!.
How much do I need to start investing?
For some online brokerages or a robo-advisor, you can start investing with just a few dollars.
Of course, we believe you’ll want a bit more money to start investing with. In fact, you may want to read this post first:
Savings by Age – Are You Saving Enough?
We know you’re keen to get investing right away but given our experiences and those from clients we help out that have been very financially successful, we suggest you establish a small emergency fund first before investing. You can also consider this bucket approach for your cash flow management:
- Bucket One – cash you need immediately for your day-to-day living expenses; usually your income is deposited into a chequing account and a small balance is maintained there to waive any bank fees.
- Bucket Two – cash you’re saving for near-term expenses, like a vacation. This bucket can also be part of your emergency fund – stashing cash when you need it most! To stash cash, make sure you take advantage of the Best High-Interest Savings Accounts in Canada!
- Bucket Three – cash set-up as regular contributions to investing; in the form of a direct debit/automation from your chequing account. This way, money is sent automatically to your investment accounts or robo-advisor every week or month, and that money is put to work for you.
We feel it’s smart to keep enough money in Bucket One to cover expenses for many weeks. It’s great to keep a few month’s worth of cash stashed as part of your Bucket Two – specifically related to your emergency fund. For Bucket Three, and how much of a positive money gap you can grow, we suggest you put your investments into a diversified portfolio of index ETFs and make a habit to contribute to those regularly.
Just starting out – what should I invest in?
A typical diversified portfolio includes stocks, bonds, and some cash. With Bucket One and Two above, you’ve already got some cash.
We believe most investors, for long-term wealth-building success, should consider investing in low-cost Exchange Traded Funds (ETFs) that passively track large stock market indexes like the TSX in Canada or the S&P 500 in the U.S. This way, by holding so many stocks, from many different sectors, you can ride market-like returns without worry about individual stock selection.
Check out these two essential posts:
- What is Investing in Index Funds and Why Does that Matter?
- Build Long-Term Wealth using our Diversified ETF Model Portfolios.
What about individual stocks?
Individual stocks can be bought as a DIY investor – we do that ourselves too!
The challenge is, for any new investor, the time necessary to research and figure out your stock-buying strategy including the strategy you can stick to over time takes effort. There could be a focus on large-cap growth stocks (the biggest stocks), dividend payers (we like those!), small-cap value stocks (younger companies or less mature companies trading at lower valuations), or any combination of these and more. When it comes down to it unless you have some experience and have some research-time stock picking can be risky. How do you know the winners of today will also be the winners of tomorrow? You can’t really ever be sure.
That said, there are some strategies we personally employ and have been rather successful at.
Read on: Is Dividend Investing Right for You?
All-in-one ETFs – a great way – how to start investing for beginners
In our posts above, we’ve outlined that generally speaking – cash savings is in a very different bucket than investing. As a general rule, we believe any near-term money needed in the next 1-2 years, at minimum, should remain in cash. Stocks, equity ETFs and even if you use big bank equity mutual funds for investing – is more suitable for longer-term investing horizons. By that definition, we mean at least 5 years or ideally much longer in our book.
Given your investment timeframe and tolerance for investing risk (i.e., the ability to stomach losses) are often related, we believe some all-in-one ETF solutions could be a great choice: how to start investing for beginners.
Whether you decide to invest with a robo-advisor or go the DIY route with a leading online brokerage as we do, all-in-one ETFs like the ones offered by BMO, Vanguard, iShares or Horizons, to name a few, can be excellent candidates for long-term wealth building.
My Own Advisor has a very comprehensive post on this subject here:
The Best All-in-One Exchange Traded Funds (ETFs).
We like these funds for new investors, since other than making regular investment contributions into these products within your accounts (e.g., TFSA and RRSP), these one-fund solutions do all the work for you.
- You no longer need to worry about getting fleeced on fees by your financial advisor! These funds are inexpensive to own – more money in your pocket!
- You no longer need to worry about portfolio re-balancing. These funds are designed to keep a particular asset allocation for you based on your risk profile/risk tolerance.
- You no longer need to worry about asset location – what funds to put where and why. These funds are designed to be held in registered accounts (RRSP, TFSA, and RRIF, and more). That means you can even hold these all-in-one funds in retirement income accounts!
Read on: What is an RRIF? How does that account work?
- You no longer need to fret about your risk tolerance or think about market timing. This is because the fund’s regular re-balancing act (for you) will keep your desired risk level in line with your investing goals.
- You no longer have to worry about your diversification. For some of these funds, you can obtain broad global and fixed income exposure to reduce investment risk while increasing your long-term return potential.
For any investor really, all-in-one ETFs are just as they sound: a simple, diversified, and low-cost portfolio solution using just one ETF.
You can take advantage of our partnership with Questrade by opening an account to buy and contribute to many all-in-one ETFs: sign up with this link to receive a $50 trading credit!.
Here are some one-fund examples of what you can buy, the asset mix of stocks and bonds is approximate:
|ETF Name||ETF Symbol||Stocks / Bonds||MER*|
|Vanguard Growth ETF Portfolio||VGRO||80% / 20%||0.25%|
|BMO Growth ETF||ZGRO||80% / 20%||0.20%|
|iShares Core Growth ETF Portfolio||XGRO||80% / 20%||0.20%|
|Horizons Growth TRI ETF Portfolio||HGRO||100% / 0%||0.17%|
|Vanguard All-Equity ETF Portfolio||VEQT||100% / 0%||0.25%|
|iShares Core Equity ETF Portfolio||XEQT||100% / 0%||0.20%|
*MERs are current to time of post.
Summary – How to start investing for beginners
That’s a monster post. Our longest and most comprehensive ever! Yet we wanted to write this post to tie many subjects and references on our site together for you. We know it can be a challenge – getting starting with investing can be daunting. We had to start somewhere too! Hopefully, this post provided many great insights into what to consider as we shared some of our experiences along the way.
In summary, here are some closing thoughts on how to start investing for beginners:
1. Focus on your savings rate – grow the money gap! While long-term returns are important, your savings rate will be a HUGE factor in your wealth-building success. We’ll link to some case studies below that highlight this point. The sooner you start saving, the more you can save, the longer you can stay invested – the wealthier you will be. In fact, if your savings rate is very high, you might even want to consider early retirement!
- For every additional dollar you save, you can invest that money so it can grow your wealth faster, and/or,
- You can realize financial independence by consuming less.
Check out how Michelle, a 20-something software engineer, plans to retire by age 40 including how much she’ll need to save to accomplish that goal.
This couple plans to retire by age 50 by using their appreciated home equity.
2. Make savings for investment purposes automatic! For years, as founders at Cashflows & Portfolios, we have treated our savings for investment purposes like a bill payment – we pay ourselves first and invest that money after cash savings/emergency funds have been established. We automate our money for investing such that we never see that money – it shows up for investing purposes in our investment bank accounts! We strongly suggest you pay yourself and never stop until your retirement goals have been realized.
3. Keep it simple! Investing can be like a bar of soap, the more you touch your portfolio, the smaller it gets. By owning an all-in-one ETF or owning some of our favourite ETFs here (some of those ETFs we own ourselves!), you have can dramatically simplify your investing approach, minimize fees, and optimize the amount of money ready to work for you. While the stock market will gyrate up and down in the short-term, long-term, the stock market has provided wonderful returns to investors over many decades – for those that stayed invested. Define and stick to a simple, long-term investing strategy you can commit to. Your future self will thank you!
For investors with longer timelines (i.e., younger investors or new investors) – we simply believe the best way to build wealth (over time) is to learn to live with stocks in your portfolio and train your investing brain to celebrate market declines as reasons to buy more of your favourite low-cost ETFs. For those approaching retirement, then it may be wise to reduce market volatility by reducing your equity exposure (some experts state that 50-60% equities for retirees may be appropriate).
In closing, as DIY investors for decades now, we’ll continue with our individual paths that marry a combination of individual stocks to go along with low-cost ETFs for diversification. We firmly believe our approaches and the information above can work for you too!
Looking for help?
If you’ve already been investing for some time, and want to know if you’re on track to meet any long-term goals including semi-retirement or retirement, we’re here to help.
If you are interested in participating in a case study, money coaching session(s), and/or obtaining private projections for your financial scenario to answer questions like “how much will I have in retirement?”, please contact us here to get started.
Thanks for your readership!
We look forward to sharing more detailed posts and financial wealth-building articles with you!