Making Money with Money


You may know the old axiom that goes "It takes money to make money." It couldn't be more true in so many ways. Unless you have thousands of dollars to invest in a business, however, then your options are much more limited.

Fear not friends! There is hope. If you're one of the lucky people that haven't ravaged their credit and actually have money TO save, then this advice is for you. If you're not, come back later and we'll give you some advice on how to get out of that debt, at which point you can refer back to this post.



Most people's first thought once they have spare money is to put it in a savings account. WRONG! DO NOT WANT! This is likely one of the most foolish moves you can make with your money. Putting it in a basic savings account in a bank is tantamount to giving the bank free money to spend (which in essence IS what you're doing when you put your money in a bank). You have 2 options, RRSP or Mutual Funds. If you have contribution room in your RRSP, and you earn equal to or more than the second tier tax bracket (This is geared for Canadian readers in particular), then that is your best investment vehicle. It will result in giving you your taxes back come April, and a solid foundation for your retirement income. I will touch on this on a later post.

If you're the average 18-25 year old, you're probably not making more than $36,000 a year. In fact you're probably making around $22,000 (assuming minimum wage plus bonuses). If that's the case then RRSPs wouldn't directly help you out, and you would be missing out on contribution room when you DO make more than $36,000 (Which if you're reading this, I really hope you do eventually, we're always looking for sponsors!). You're best bet then is a little something called Mutual Funds.

You may have heard the term tossed around before, but never gave it much though. Mutual Funds are essentially pools of money that are managed by various companies. These pools of money are then invested in various different types of stocks, usually divided by industries or sectors. This is where the maxim "Don't put all your eggs in one basket" applies. By investing in a variety of stocks, you offset a large amount of the risk involved in investing directly in the stock market.

Mutual Funds do not come without risk, however. There are different types of mutual fund categories, from "Income Funds" (Very low risk) all the way to "Aggressive Growth" (Very high risk). Most mutual fund advisors will assess your suitability for various funds by a slew of questions ranging from how long you plan on saving the money to how comfortable you are with various amounts of risk. If you're more financially astute however, these questions should be irrelevant and you should be coming into their office with an idea of what you want already in mind. I will go over the specifics of the different types of funds in future posts, as the risk difference between funds directly affect how much you can expect to make off of a particular fund.

The main difference between Mutual Funds and savings accounts is this: If you were to put $4,999 or less in a savings account, you could expect a return of %0.02 compounded monthly, which would equate to approximately $1 in interest over 1 year. Some banks are much better now, where they give up to 2% interest annually, which can net you $98.99 for the year. Now for an aggressive growth fund, you can expect an average annual return of 10-20% (NOTE: In a recession economy this number CAN go into the negative where you can LOSE money). If you calculate a return of 10% in a year, you can expect a return of $498.98.

Coming out of a recession however, like we are now, you can expect to get much closer if not more towards the 20% rate, netting you up to $998 in interest in 1 year. Much better than that usual $1 interest in a savings account no? Again, I have to stress that with higher potential gains, there are higher potential losses. Depending on the type of fund you invest in, you can get some that are very low risk that can still offer more than the banks highest 2% interest rate to be about 3-5%. Regardless of your situation and how much of a risk taker you are, Mutual Funds are usually the safest bet all around.

If you want to learn more about Mutual Funds, or other saving ideas, please comment about it and I will be sure to write future posts about them! Stay tuned for more installments of how to best choose the Mutual Fund for you, and how to best manage your RRSPs.

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