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Dear Nancy,

I am a 26 year old self-employed hard-working guy.  My business has been constantly growing on an annual basis and has finally come to the point where I can start drawing an income. I recently sold some real estate and have $225,000 left over. I was always a firm believer that real estate was the best way to make money and create equity. In the last couple of years, the banks have made it difficult for me because I am self-employed. I also think the real estate market is due for a correction. Eventually, I would like to buy another house either to live in or rent out.

I've maxed out my TFSA, put about $30,000 into some blue-chip stocks and I invested $145,000 with my financial planner into a high-risk portfolio which historically has produced on average a 9-12% return. I don't need the money right now as I am renting a bedroom from a friend for $400 a month. I am putting the amount of my previous mortgage payment ($1,500 a month) into this portfolio. 

In your opinion, is this a smart avenue to go or are there other ideas that I should be considering at this point? Your thoughts and contribution would be greatly appreciated as they really don't "teach" you any of these situations in school. I hope to hear from you and I look forward to reading more of your future articles.  

Thanks,

Craig

Dear Craig,

First off, let me praise you for the accomplishments you have achieved at such a young age. You have been such an industrious and a prudent saver in a short period of time. You are well on the path to future financial security. Being a dedicated saver in your early years is the key. The power of compounding will serve you well. Even if you stop saving later on, when you have a family and other financial obligations like another house, you have a good base nest egg to grow from.

There are many possibilities that you should consider and because of the many variables that can happen I can not give you a definitive answer. The driving factor will be what makes most sense to you that you can be comfortable with.

Here are a few scenarios for you to consider.

1. You can continue with the more aggressive strategy that you have now. Note that more than 50 per cent of your assets are invested with high risk. As to the fhe future monthly savings that you are adding  - I would tend to have you add this to blue-chip dividend-paying stocks; specifically in Canadian stocks in order to benefit from the tax credit.

2. You can switch your strategy to the opposite end of the spectrum and have all your assets invested in an ultra-conservative portfolio to make sure that there is little-to-no loss of capital and to protect your nest egg. Again, use Canadian dividend-paying stocks and/or ETFs.  Reinvest the dividends since you have earned income, and you can buy more shares at no cost.

3. You mentioned that you would like to eventually buy another house. Since you don't live in a major city (I have had a telephone conversation with Craig to get further details), there is less risk of being "locked" out of the housing market. I have seen several people in Toronto sell their homes, rent in anticipation of a real estate market pull back that hasn't happened and the average house price has risen to the point that they can't afford to buy back in. You should be careful about tying up your funds such that you can't easily access them if you decide to buy a house. If you are thinking about buying to rent, then you can borrow against your investments for the down payment, write off the applicable interest on that loan as well as the mortgage. As you noted, there may be more hurdles for you to qualify because you are self-employed. Get pre-approval from your bank so you know what you are dealing with.

4. You haven't mentioned having an RRSP so I would have you consider opening one and contributing the maximum you are allowed. Since you are just beginning to draw an income, it may not make sense to declare the deduction, but you can contribute the amount you are allowed. You told me that your company is incorporated and that you have a low income. Whatever income you pay yourself, you will still be allowed 18 per cent of your income to a maximum of $24,270 to be contributed to an RRSP. For example, you can put in $2,000 each year. Say after 3 years of contributing, you can pay yourself a higher income and deduct the $6,000 of past contributions from that income. In the meantime, the money has been growing within the tax shelter tax-free. As long as you have earned income  - and therefore contribution room  - you can put money into an RSP to get the deduction but there is no rule that says when you have to use the deduction.

Even though you are on the right track to being financially secure, I suggest you seek a professional to help you draw up a financial plan to give you some guidance. You will then have some kind of projection to what you need to get to, whatever your goals are. Only use the plan as a road map. There will be many unpredictable things happen along the way that you will have to make allowances for such as marriage, children, how many children you will have, at what rate will your business and income grow etc. You are off to a great start, so it is important you continue on when you have so much valuable time ahead of you.

Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can send your questions to asknancy@rbc.com as well.

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