The Money Club for Young Adults
The Golden Secret: Pay Yourself First
The pitch: Save 10% of everything you make and invest it for long term growth. If you can follow this one simple guideline, one day you will likely be very wealthy.
What!? Yes, I know that sounds pretty simplistic. Here is a little more information that will help explain things.
What is pay yourself first?
- painless way to save.
- you will hardly notice the money has gone.
- your lifestyle will not be affected. Until you are older and your investments have ballooned in value.
How do you do it?
- the only way to save for anything: have the money come right off your pay cheque , or right out of your bank account - before you have a chance to spend it.
What to do?
Step 1.) open a bank account
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RBC Advantage Banking for students is a good option
Step 2.) open a 'self directed' investing account
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RBC Direct Investing is a good option
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open a registered TFSA or a non-registered 'cash account'
Step 3.) in your 'self directed' account buy an ETF
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VFV.TO: Vanguard S&P 500 Index ETF
Earnings get deposited to bank account => they are then immediately transferred to your investment account => they are then put into your investment of choice
What to invest in? Be an owner (stocks) not a lender (bonds).
- over the long run, stocks are a much better investment than bonds.
- you are betting on the Canadian, US and global economy.
- we are living in great times.
- the next 20-30 years will present some of the greatest opportunities ever. You want to participate as an owner.
Invest in individual stocks? No.
- invest in ETF's
- performance: due to their very low fees, ETF's outperform the great majority of active managers over time.
- diversification: made up of basket of different stocks.
- limited amount of up-front research required: once you settle on an ETF you like you are largely done.
- no need to follow: they are also hands-off investments: you don't need to follow them closely.
- they will fluctuate. Good. You want to buy low (when you are young and just getting started). The market will bounce back.
- no need to try and time the market: dollar cost average: buying ETF every month with a fixed dollar amount.
How to automate the monthly withdrawals?
Taxes? Not if you open a self directed TFSA
What about real estate? That is complicated.
Get rolling on ETF's. Build these up. Real estate down the road (primary residence).
The failure of trying to 'budget your way to wealth'
- people are unable to separate wants from needs.
Does time matter?
Getting started saving early in life makes a BIG difference. Compound interest is given a chance to work its magic.
Initial investment = $5,500
Annual addition = $5,500
Yearly interest rate = 10%
Total value of investment:
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30 years = $1,000,000
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25 years = $600,000
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20 years = $350,000
If you start at age 25, by age 55 you will be a millionaire. Start at age 30, you will have $600,000 at age 55 = $400,000 less. Start at age 35, you will have $350,000 at age 55 = $650,000 less.