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Question from Andrew James, 30, in Toronto: At what point in your life should you start investing money?
Ms. Simmons work with young people to help them navigate the new economic climate with personal finance, ethical investing and small business advice.
Shannon Lee Simmons is a financial planner and founder of The New School of Finance in Toronto.
Answer: This is a great question. Investing can be a great way to grow your money and avoid getting the “don’t keep money in your chequing account doing nothing” speech.
However, sometimes money should go to other places before being invested.
Below is a game to help you know when you should invest and when you should divert money elsewhere or keep it in your chequing account. (What? Did she really just say that?)
Should I invest?
Question 1: Do I have debt (not including a mortgage)?
YES: Direct savings toward debt. Tip: Pay down highest-interest debt first and consolidate where you can.
NO: Proceed to Question 2.
Question 2: Do I have three months (six months if you’re self-employed) of my fixed living expenses saved for emergencies?
YES: Proceed to Question 3.
NO: Save up until you have an emergency fund set aside. Tip: Use a high-interest savings account for your emergency savings. Don’t use a GIC, since your money will be locked in. In addition, if your bank offers free banking if you carry a certain amount of money in your chequing account, you may want to use that chequing account to house your emergency savings. Think about it, if you save $20 a month in bank fees by carrying $3,000 in your chequing account, that’s a rate of return of 8 per cent, which is way higher than what you’ll get in a high-interest savings account. Don’t invest your emergency account in bonds, stocks, mutual funds, index funds or ETFs. All of these investments have market risk. This means that they go up but they can also go down. Market volatility is a normal part of investing. But, we don’t want money that we may need for emergencies to be exposed to any of that volatility. Can you imagine if you lost your job during a financial downturn? That would be scary.
Question 3: Am I saving for a major purchase in the next 18 months? (eg. car, house, back to school?)
YES: Don’t invest the money earmarked for this major goal. This money should be liquid and cannot handle any stock market volatility. If you’ve got enough saved up for this major purchase, then any additional money could be invested without risking your short-term goals and liquidity constraints.
NO: These assets could be invested without risking your short-term goals and liquidity constraints. Tip: Map out an investment strategy for these new assets that can be invested. You’ll want to utilize your TFSA and RRSP strategically and invest with an asset mix that suits your time horizon and risk tolerance. Congrats! You’re adulting pretty hard right now.
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