To start investing one needs capital. For most of us it comes from our savings which is our job’s salary less cost of living expenses. What is left over is the extra money we have to invest.
To succeed in the market one needs to save for capital, cut management, debt and service fees while keeping our taxes to a minimum. A big item I had to do was to kill any debt I had and once that was done it really opened up my savings and my investing. It is virtually impossible to make gains in a market that yields 8 to 10% if debt is costing you anywhere from 6% to 20% along with fees and inflation.
Start with a Budget and Analyse your Expenses
I started with a budget by listing my net pay each month and subtracted rent, daily entertainment and food expense, cable, phone, bank charges, haircut, car costs, recreation costs, medical and vacation. If left with a balance that could be my contribution to my investing accounts. If I didn’t then I needed to analyse my expenses and see what could be altered to give me a surplus for investing. In my case eating and having drinks out is a big expense to manage to have more to invest.
On the other side of the ledger if the budget is too tight and look for ways to increase income like a website or part time job. Two blogs that cover this are Dividend Mantra and Mr. Money Moustache discuss a lot of ways to budget and save. Recently (2016) I have taken some steps similar to what is in these blogs.
Krystal Yee writes a blog “Give Me My Five Bucks” back and has a post on budget with a spreadsheet that is clean and easy to follow and something similar could be used by anyone.
Pay off Debt
Any credit card debt or credit lines need to be paid off. The only debt that is okay is mortgage debt as long as it is budgeted for adequately. The real estate in itself is an investment. I have never bought a place and will only look at it in comparison to the stock market on this site in a future post.
Some people juice their investment returns with margin, which is borrowing to invest, but I am not comfortable with this so I only invest what I have. In market crashes when the assets lose much of their value the margin accounts are often called by the banks which means the investor has to pay them off. This forces investors to lock in losses by selling stock that have lost value to cover the margin that is being called. Margins work great when the market is going up but are very harmful in crashes. For me it is too much risk.
Do not Pay Management Fees
I think this is the second big reason for do it yourself investing. When I purchase the stocks outright I only pay the commission and if I hold for a long time I do not pay anything more.
Pay as little taxes as you can
I feel the options of RSP and TFSA make keeping taxes down very easy. I always try to max out on both accounts. If there is no room left in these accounts then I put it in a non registered account. As soon as there is room I transfer this money to the registered accounts.
In non registered accounts there is still an advantage in that taxes on dividends get a tax credit and capital gains is calculated at lower rates than employment income.
If I do not have enough to max out both the RSP and TFSA the choice of which to contribute to first can be difficult. I consider my income to make this decision. While working my income is over $75,000 so I want to defer the higher income tax rate I am at until I retire when my income will be lower. This would make my RSP my first contribution choice. If I was earning below $40,000 and was in a lower income tax bracket then I would fill the TFSA first.
Once the money was there it was time to sign up with an Online brokerage
Do you have a debt story or suggestions on debt? Please comment below.
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