When students see the term investing, they usually have one of two reactions. The more common and cautious approach is: “I have no money to invest, I’m taking out student loans for goodness sakes. Anyway, my uncle lost a bunch of money on the stock market during the recession and I would rather just buy a new car.” For the more risk-tolerant individuals the word investing can inspire get-rich-quick schemes and visions of grandeur as they watch Wall Street – Money Never Sleeps for the third time.
Neither of these common responses is in a student’s best interest. Even if you believe you have no money to invest now, you should definitely start educating yourself on how to accumulate wealth or you will be doing yourself a disservice. My guess is that there are areas of your financial life you could probably already reform to your immediate advantage. On the other hand, going and throwing your money into a penny stock because you read an article on Reddit is probably not in your best interest either. Over the next couple of weeks I will do my best to lay down a very, very basic outline of how to look at the big picture of investing.
There are of course tomes written on the subject, along with almost unlimited strategies and tips. I want to make clear that I am not a finance professional by any stretch and that you should seek professional help before making any large financial decisions.
Movies and TV shows that portray stock traders living ‘the high life’ and picking stocks with some god-given gift have given many people an inaccurate picture of investing. The much less ‘sexy’ reality is that most investment success stories are the result of planning, saving and common sense. I know this is not what people want to hear, but the good news is that there is a sort of magic involved with investing if you start at a young age. This magic is known as compound interest, and we’ll get into it a little later.
Setting Goals – The Beginning
The absolute first thing you must do when beginning your investment journey is simply define why you’re doing it and consequently come up with goals. If working long hours your entire life sounds pleasing to you then maybe you will not want to worry much about long-term investing and would rather just buy the luxuries you appreciate. If you want to retire early, go back to school, have children, or do 101 other things in your lifetime, then you can greatly aid yourself by planning for these eventualities. Your goals by nature will likely be fluid and changing, but it is important to have them nonetheless.
Most financial planners will tell you that savings and investment goals can be broken down into short-term, mid-term and long-term goals. This makes a lot of sense when you think about it. Just putting money in the bank blindly doesn’t really help with investing. If you’re like most people, you will probably be more motivated to save if you can see specific goals and have a plan to get there.
Setting Goals – Short-Term
Short-term goals can include smaller steps such as establishing an emergency fund. Others might include figuring out a budget and where you spend your money; maybe saving enough to go away to a resort for a weekend, or treating that ‘special someone’ to a great meal at a high class eatery.
Setting Goals – Mid-Term
Mid-term goals are often targets that will require more money and consequently a longer time frame to save for. Housing renovations, get-away vacations, new vehicles, or new appliances are mid-term goals. Other mid-term goals might be part of a larger overall objective. An example of this would be maxing out your RRSP contributions for the year. The end goal would be a more comfortable retirement, but the focus for that year would be to save enough to contribute the maximum allowable amount to your RRSP and/or RESP, and TFSA accounts (if you don’t know what all these acronyms stand for yet, don’t worry, we’ll get there).
Setting Goals – Long Term
Long-term goals. These are obviously the ‘dream’ goals that will take a concerted effort over a substantial period of time to achieve. It is actually amazing what we can accomplish in the long-term if we plan for it appropriately. This type of planning will become more and more important as an aging population begins to strain our social security programs. Buying a home, a cottage, or providing for yourself in retirement are examples of long term goals. For one person, travelling extensively when they hit a certain age might be a priority, for others, buying that beautiful second home overlooking a lake might be the goal. The exact goal does not matter, it’s the plan to get there that does.
Before we determine how to save and invest we must first realize why we should put the effort into learning about investing and following through on investment strategies. Most people are quite surprised to find out that many of the dreams they thought were beyond their reach are actually quite attainable if they just start planning properly from a relatively young age. Are you setting goals?
Next week we’ll talk about the next non-sexy step to growing your money – saving.