The company I work for recently laid off 20 people from our department.   The lay-offs were not surprising, as this is common when companies face major financial challenges.   A close coworker was one of the affected employees.   It has been four months since this happened and my ex-coworker has not found a new job yet. His unemployment is taking a toll on him.  He is running out of money from his severance package and his wife is on maternity leave - they recently welcomed a child.  The holiday season is approaching and it is not traditionally the time when companies hire new employees.  The last time I met him, he sounded hopeless and lacked confidence about the future.

I asked my neighbour Ravi how people can invest and proactively manage situations like this.  Can an employee with an average salary successfully invest to face the inevitable financial challenges he or she may face throughout life? There is no better person to ask about this than Ravi, who is passionate about investing and has a good understanding of asset valuation at a global level.  You can read more about Ravi here.

Here are 10 tips from Ravi based on his personal experiences.  As per Ravi, investment is not about financial wizardry, but rather about changing our financial behavior, having a plan and sticking to it.

[caption id="attachment_11788" align="aligncenter" width="770"] Source: HBSB.org[/caption]

1. Have financial goals 

The first step towards investing is to know how much money you want in the future.  Set major financial goals like buying a house, replacing your car after 8 years, going on that dream vacation, saving for your retirement etc.  Determining these goals will let you decide how much to save, so you are not saving less or more than what you need.  Also, categorize your goals into short term, medium term and long term goals depending on when you would need the money.  This will help you convert financial assets into actual cash when you need it.

2. Investment begins with saving   

You need money to invest and one sure way of getting it is by saving.  Having a saving regiment and saving say 15% of your income on a monthly basis is the first step towards getting towards building successful investments.

3. Understand good debt vs. bad debt 

Taking a mortgage to buy a house that you can afford is a good debt.  Or getting a student loan to study so you can get a better paying job is a good debt.  Going on a vacation with credit card debt? A bad debt.  Feel free to borrow from a bank or your parents or siblings in a manageable way.  It is a good way to make use of other people's money to increase your wealth.  In addition, dealing with the lenders (whether banks, siblings or friends) and making agreed payments on time is a great way to establish life-long trust and financial discipline.

4. Find the right life partner 

They say opposites attract when it comes to love.  However, you don't want to be opposites when it comes to finance, one a saver and the other a spender.  You want to have similar financial goals and working towards it can make life a bit more satisfying.  Plus, finance is one of the reasons people divorce and divorce is costly.

5. You cannot rely on your parents 

In Tamil culture, parents tend to save hard and buy assets to pass them to their children.  They feel it is their duty to do this.  However, it is not going to work in the future.   People are living longer and your parents will need all the money to live and enjoy their old age.

6. Know the different investment vehicles

People would like you to be financially prudent and successful including an important entity - the government.  The government has created different plans like RRSP, TFSA, RESP and RDSP with tax incentives to encourage you to save and invest.  Learn what these plans are and how to use them.

[caption id="attachment_11789" align="aligncenter" width="480"] Source: DavidSuzuki.Org[/caption]

7. The investment Process

There are hundreds of ways to invest in the market and there are assets like stocks and bonds to invest in.  A proven strategy to invest is to set up a monthly contribution plan and invest in index funds or low cost mutual funds on a monthly basis, automatically.  Most large employers offer this facility to do it at every pay.  Or you can set it up yourself easily at a bank.

There is some sort of consensus that a low-cost portfolio with a majority diversified stock fund will average 7% annually over time.  Consider how much return you will get if you invest $350 every month starting at age 25 for 35 years.   You can end up with $602,381 in 35 years as shown below:

Now, consider that you started investing $350 every month starting at age 25, but you also increased your contributions by 5% every year because you are getting paid more or you get a nice bonus every year.  Your investment balance can be $1,124,399 after 35 years.  That is, you would have accumulated more than a million before you turn 60.  Of course, 1 million today is not the same as 1 million 35 years from now due to inflation.  To mitigate inflation, you can consider contributing more on a monthly basis or own hard asset like a house - the value of which tends to increase based on inflation among other things.

(Interest compounded yearly - added at the end of each year)

This is a sleep easy investment plan whose essence is to do a one-time setup, where money is transferred automatically from your pay cheque or bank account on a periodic basis to the investment account.  In addition, the stock market tends to go up and down but by contributing on a regular basis you would have bought when the prices are low and high thus paying an average price over time.  If you are not 25 but 35 or 40 years old and you did not start investing, you just have to contribute more on a monthly basis to catch up.

8. Beware of fees

Invest in mutual funds that charge low fees (also called Management Expense Ratio or MER).  If you walk into a bank and tell the rep that you want to invest in mutual funds, they will usually sell you the higher fee funds.  Paying a higher fee will eat into your return over time.  One example of a low cost mutual fund is TD e-Series fund.  The alternative to mutual fund is ETF (Exchange Traded Fund) but it is harder to setup an automatic investment plan.

9. Financial planners

If you are overwhelmed, you can consider using a financial planner to navigate through the complex investment options available out there.  However, like in any profession, there are good and bad advisors.  Find a good, certified financial planner and beware of high-fee mutual funds.

10. Read about personal finance

 Financial literacy and success is an important component of our well-being.  Unfortunately, schools do not teach about money, saving, spending or personal finances elaborately.  We either learn it the hard way by not being prudent with money, or don’t learn it at all, in which case we will regret it in the future.  Read some books in your spare time, books like The Wealthy Barber, The Automatic Millionaire etc.  I would also recommend a magazine called MoneySense for Canadian residents.  It is the bestselling Canadian personal finance magazine and you can subscribe to it for a small fee. Or you can read some of the articles online at MoneySense.

I agree with what Ravi mentioned above:  save, invest and prosper.

Reference:

Money Sense

Calculation using the compound Interest Calculator at:

http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

Low cost TD Eseries mutual fund

http://www.tdcanadatrust.com/products-services/investing/mutual-funds/td-eseries-funds.jsp

Featured image sourced from VisaPro.

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