Introduction to Investment Opportunities for Students
It is a good idea to have a mixture of different investments to protect your savings.
By: Betty Yan, Staff Writer
Students often neglect to invest because many of us have a tight budget that needs to cover tuition, housing, food, and numerous other expenses. We think: shouldn’t investments be made when we are able to set aside the necessary funds? However, in reality, waiting to acquire wealth and then investing is not the right strategy. Being poor now is all the more reason to begin saving for the future.
Even though most students do not have the income to finance long-term investment, there are still options available. Putting your money in a savings account is a start, but with interest rates of less than 1% per year at banks, this isn’t the way to make your money grow. A better alternative is the Tax-Free Savings Account (TFSA), which allows Canadians 18 years and older to save up to $5000 annually and pay no tax on investment income.
No tax on earnings generated from the TFSA means you can build savings faster. Unused TFSA contribution room carries over to future years. So, if you only save $1000 this year, you can save $9000 the subsequent year. You are also able to make tax-free withdrawals and re-contribute the amount you withdraw in the following years.
The TFSA offers higher interest rates than many savings accounts and includes various investment options, such as mutual funds, Guaranteed Investment Certificates (GIC’s), stocks, and bonds. These investments differ in risk and profit, and it is a good idea to have a mixture of different investments to protect your savings.
A mutual fund pools money from numerous people and invests it according to the fund’s objectives. Professional money managers make decisions to buy and sell investments, such as bonds and stocks. You purchase units in the fund, and your shares rise or fall with the value of the investments. Mutual funds are not risk-free and cannot guarantee returns.
Traditional GIC’s provide a secure investment that guarantees your principal with a stated interest rate. With GIC’s, you do not need to worry about market fluctuations, making them more suited to short-term investment.
When you buy a bond, you are lending money to a company so that it can expand. In return, the company promises to pay you interest when your money is returned. When you buy a stock, you own a share in a company and the value of your share depends on how well the company does. Bonds tend to be less risky than stocks because bondholders know they can at least get their principal investment back so long as the company does not go bankrupt.
The investment market does not have to be an intimidating place for students. To open a TFSA, you can contact your financial institution, credit union, or insurance company and provide them with your social insurance number and date of birth. Any amount of money you are able to put away now will acquire compound interest and make a positive impact on your future wealth.
Feature and banner images courtesy of 401(K) 2012