Category: Tax

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Scary October: A bad month for spending

We try to do our best here at Casa del CIQY, but sometimes, things can get away from you. This October was one of those bad months for us and saw a big spike in our household spending.

Maybe you’re thinking to yourself “they must go overboard for Halloween and Thanksgiving” (recall we are Canadian so Thanksgiving is in October for us). Well, we do like Halloween around here and we did host Thanksgiving, but we did pretty well in terms of spending on both of those fronts. What we did have though was a number of irregular expenses that all ended up arriving at around the same time, leading to a month where our net income was very much in the red.

The Expenses

So what were these expenses? Well for starters, our home renovations picked up some serious steam during the month of October, which also accounts for the dearth of blog posts during that month. Our renovations were put on the back burner for a lot of the summer so we could enjoy the weather and each other. Mrs. CIQY and I tend to work opposite shifts, so if we don’t see each other on weekends, we pretty much just don’t see each other. But when the weather started to turn cold we also realized that New Baby was not that far from arriving and we needed to finish our renos before that happened, so we kicked the renovations back into high gear. Consequently, even though we’re doing the work ourselves to save money, there was significant spending on materials during the month.

Next, we had to buy new tires. Eight new tires, to be exact. My wife’s winter tires had worn down their tread far enough that they wouldn’t last another winter, so we needed new winter tires for her car. Meanwhile, I replaced my car over the summer (which I bought used and got a great deal, thankyouverymuch) and I needed winter tires for my car as well. So there was another big expense for the month. Two, if you want to nitpick.

If that wasn’t enough, we bought a new vacuum. I’m not sure when the last time was that you bought a vacuum, but they tend to not come super cheap. And given that we live in a household with three fur babies who shed, this was not an expense we wanted to cheap out on. We have needed a new vacuum for a while and have been on the lookout for a while as well. It just so happened that this was the month when we finally ended up pulling the trigger.

And to round it all out, there was a property tax bill due. Now maybe this doesn’t necessarily count as “irregular expense”, but it’s also not one that is due every month. In our case, taxes are paid in five installments, on five different month-ends. October happens to be one of those months.

The Silver Linings

On the other hand, I don’t view any of these expenses with any regret. They were all justified, they were all arguably necessary, and furthermore each case represents good value (except maybe the property taxes, but there’s really not a whole lot you can do about that one. Taxes gots to get paid).

Let’s start with the renovations. As I have mentioned, we’re doing the work ourselves with a lot of help from my handy dad. So right away, we’re saving a lot of money on labour. My dad and I both estimate that if we had hired contractors to do this work for us, it would have cost us approximately $25,000. So far we’re on budget to have it all done for about $6000-7000.

Furthermore, we’re significantly adding to the value of our house. We’re adding a full bath, turning our formerly 1.5 bath house into a 2.5 bath house. And in refinishing our old rec room, we’re adding insulation where there was none before to the external walls. So we’ll be saving a lot of money in future years in heating costs. And of course, most important of all, finishing these renovations will bring us more enjoyment of our house, we’ll get better use out of our basement space, and we’ll be making our lives easier. Win-win-win. No brainer.

Next, the winter tires. I’m of the opinion that when you live in Canada (at least in our part), winter tires are essential. Especially when I think about the safety of my wife and kids, this is something that is well worth the expense. So I’m definitely not second-guessing the purchase of winter tires in general. That’s a good start.

But beyond their being essential, we also got a good deal on the tires too. My wife got a great deal at Canadian Tire during their “Biggest Tire Sale of the Year” or whatever it’s called. And we had them installed on a set of steel rims that we got for free, along with the old set of winter tires, from my brother after he got a new car and his old winter tires didn’t fit. As for the tires I got for my car, I found them on Kijiji. They are fantastic tires. Top of the line Nokians, from Finland. Normally these things retail for about $200, per tire. I got a set of four, on rims, for $350. And lots of tread left. These babies should last me for a good 3 or 4 winters I’d wager. Not to mention the man I bought them from was very nice, and had even marked them for me, for proper tire rotation. This was definitely an example of good value for a dollar. Kijiji, baby!

Finally the vacuum. Like I said, we have pets. Three of them, to be precise; two cats and a dog. And a toddler, and a baby on the way. Our old vacuum had become unreliable. It was also heavy and had a broken power switch (we had to just plug it in to turn it on and unplug to turn it off). We had gotten several glowing reviews for Dyson vacuums from family and friends, and decided we wanted to get one for our next vacuum. When someone you respect and trust says “it’s the last vacuum you’ll ever buy”, that is the best endorsement you can hear. This was something we already knew we wanted. So when we came across an older model that was marked down at Canadian Tire and came with a $50 rebate, we recognized our window of opportunity and climbed through it.

As for the property tax… well if you know a way to get out of paying that bill, I’d love to hear it. On the other hand, as a good citizen I recognize the value of paying my taxes and I do it willingly. Personally I think there’s some good value in this expense too. As long as my plumbing keeps working, my trash keeps getting picked up, my streets cleaned, my traffic lights stay operational,…

So add it all up and it was an expensive month. There’s no two ways about it. On the other hand, we’re closer to having an extra bathroom and an awesome rec room to play in, we have peace of mind when it comes to driving safely this winter and for the next few winters, and we’ve got an amazing vacuum that should last us a lifetime. So it’s not exactly like we’ve got nothing to show for all that extra money being spent. Sometimes it’s better to focus on what you get, rather than on what you have to give to get it.

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Savings and Investment for Noobs

A friend recently came to me with a “problem”. He had recently come into some money. Prior to this my friend didn’t really have anything in the way of savings, nor any knowledge of what to do to put this money to good use. This is one of those good problems to have. He had money, but needed knowledge. Money can be hard to come by. Knowledge is easy to acquire. You just need to know where to look.

So this post is basically an answer to my friend, as well as a handy guide to others in similar situations who maybe know they want to save and invest but have no idea how to start.

Up front, I’ll just say I understand how daunting this all can be to anyone who has never learned anything about investing or banking or finance at all. There’s a lot of factors to keep track of. I’ll do my best here to try and make it simple enough to follow.

Factor #1: What type of account

Regardless of what types of investments you are looking to hold, those investments need to be held in some kind of account. For the purpose of this piece for beginners, I’ll address four different types. Once again for my readers, this is Canada-specific. If you don’t live in Canada then the particular account options will be different and have different names, but the concepts may be similar. I have already touched on some of these considerations in a former post, but I’ll give a bit more detail here:

  1. Normal, non-registered accounts. Most if not all banks will have some investments they will happily sell you. If you happen to hold these investments in a non-registered account, then they will be subject to tax of some kind. So if the investments pay dividends or have some other income stream, then you will have to pay income tax on that income in the year in which it is received. Likewise if you sell any assets in a non-registered account and make money on the sale, you will pay tax on the capital gains. Capital gains just means profit when selling investment assets. This is the “normal” situation, so to speak. If you make money, the government wants their share of the tax on it.
  2. Tax Free Savings Acount (TFSA). This is a registered account. The main thing to be aware of here is that there are limits to the amount of money you can put into this account. The details of contribution limits are explained here. The tax benefits of this account are right in the name; any income or profits earned in this account are tax free, which is great. You are free to withdraw money out of this account at any time, but you have to be very careful about putting money back in, to make sure you don’t breach the contribution limit. This makes this account great for short-to-medium term investing if you are looking to earn a little income on your money and want access to it before you retire.
  3. Registered Retirement Savings Plan (RRSP). This is also a registered account, as it says in the name. It also has contribution limits, but those limits are much greater than the limits for TFSAs. Its main benefit is for deferring tax. What this means is any contributions made this year will reduce this year‘s taxable income. So if you contribute $1000 now, your taxable income for this year at tax time is reduced by $1000. That is because this type of account is geared toward retirement. Tax will be paid on any money taken out of it during retirement, as if you had earned it in the year it was withdrawn. Because it is designed with retirement in mind, there are witholding tax penalties if you withdraw money early. This type of account is great if you are currently in a higher tax bracket and want to reduce your tax payable this year, but not so great if you plan on using the money before you are 65 because it is locked away.
  4. Registered Education Savings Plan (RESP). This account is a bit unique because it is designed specifically for saving for a child’s education. If you have no children (or your children are already over 18) then this account doesn’t really apply to you, but I’m including it here because if you do have children under 18 then this account is a no-brainer.  Why? Because the government will match 20 cents per dollar on the first $2500 invested each year to a maximum of $500 per year, up to a maximum amount of $7200 per child. This extra money is called the Canada Education Savings Grant (CESG). This is free money, and a 20% return on your investment without doing a single thing. Of course, if your child doesn’t go to college or university then you do have to give the CESG portion back, or transfer it to a sibling who still has contribution room, but why not take that money in case your child does want to pursue post secondary education? An RESP can stay open until the child is 36, just in case he or she isn’t sure they want to go to school right away. If they definitely don’t, then the money (after returning the CESG portion to the government) can be transferred to an RRSP.

All four are useful and have their respective merits and flaws. RRSPs are great, especially when your employer also contributes to one for you, but only if you don’t plan on using that money before age 65. TFSAs are great but they don’t really do anything for your income taxes in the current year, and there are limits to how much you can put in. If you’re lucky enough to have maxed out your registered account contribution room, then you have no choice but to use a non-registered account. You get the idea.

Once you have decided which type of account you want to open and hold your investments in, it’s time to decide what to put in it. But before we get in too much detail about the different options, we have to address two major concepts: volatility and diversification.

Volatility

If you’ve ever taken an economics or finance class, and probably even if you haven’t, you might be aware of the “risk vs reward” trade-off. The idea is simple; the riskier an investment is, the greater the potential returns. The classic Economics 101 example of a risk-free asset is a government bond. So a sovereign government issues a bond and that bond has a yield of say 3%. The reason this is risk free is because the government is guaranteeing you that you will get your 3% return. The only risk in holding this bond is the risk in the government going broke and not being able to pay you your 3% (or your principal back!), but since most governments are also in the money-printing business, this risk is pretty darn low. Some countries are on shakier financial ground of course, and maybe their risk of default is greater than that of other countries. Well guess what? Those countries will have to offer a higher yield on their bonds in order to get people to buy them. That is your risk vs reward paradigm in action; riskier bond, higher yield. Corporations also can issue bonds and they tend to be a bit riskier than government bonds, which of course means they offer even higher yields. But once again, the only real risk to the investor is if the company goes broke. Bonds are safe because outside of the rare event when a country or company goes belly-up, you get your yield, guaranteed.

On the other end of the volatility spectrum, you have the corporate stock. Stock prices go up and down all the time. For the most part when you’re talking about stable, major corporations, prices do go up in the long run. But between now and “the long run”, their stock prices can go way up or way down, depending on a lot of factors. They are volatile. So say you invest $1000 in ABC Corp today, and promptly forget about your investment. Two months later you look at their stock price and realize that it has gone down and your initial investment is only worth $800. Boo! That’s terrible! You’ve lost money. But you hold onto your stock, because you’re a lazy investor. A couple of months later you check back and see that the stock price has gone up again! Now your investment is worth $1100! You’re a brilliant investor because you have earned a 10% profit on your investment and now you are rich. Bully for you!

Of course, one day, ABC Corp could get mired in a major scandal and reveal that they are completely broke, making your investment worth essentially $0.

This is the concept of volatility. Riskier assets will pay greater returns, but they are also a bigger gamble. If you can stomach watching your investment go down for a while in the hopes that it will recover and not go broke, then you are okay with risk and are capable of seeking higher returns. Historically, stocks are a better bet for making money than unrisky bonds. The danger is that in the interim, risk averse people watch their investment shrink in a crisis and want to cut their losses by selling while things are low. This is very common. It is also the wrong thing to do, because historically, most companies don’t go broke, and most company’s stock prices recover. Most. The majority of investors hold stocks and bonds, but mostly stocks. The higher your appetite for risk, the higher your proportion of stocks in your portfolio.

Diversification

This is a word that gets used a lot but I wonder how many people don’t understand what it means? Basically this is the “don’t put all your eggs in one basket” principle. Again, let’s go back to Econ 101…

Imagine you lived in a world with only two types of fruit: apples and pears. Some people only eat apples, some only eat pears, and some people eat both to varying degrees. Now imagine some event has done great damage to the apple crop. There is an apple shortage and consequently the price of apples has gone through the roof. What do you as a consumer do? Well, if you’re wealthy and you hate pears, then maybe you just pay through the nose for your apples and gripe about it. But if you’re most people, you change your consumption and buy more pears until the price of apples comes down again.

Now assume instead that rather than being a consumer, you’re the owner of Apple Co. (okay, maybe this was a bad example… Apple Corp? No, that’s no good… Granny’s Apples Inc? Whatever, you get the idea). Your supply has been hit and you’ve had to raise your prices. Consequently your sales are terrible because now everyone is buying pears instead. Well if you own this company’s stock, then guess what? You effectively are one of it’s owners. In this scenario, the share price for this company would tumble and your investment and net worth would take a hit. Meanwhile shares in Pears Inc. are probably getting a nice healthy boost from all those additional sales.

So how do you avoid this potential calamity? Well, you own both companies. By buying shares in both the apples company and the pears company, you hedge your bets and reduce the volatility of your portfolio. This is what diversification means.

In the real world, sometimes individual companies suffer. Sometimes entire industries suffer. Sometimes the economies of entire countries suffer. A well diversified portfolio spreads around your risk so that your investment can withhold certain shocks and keep things even keel, in the hopes that if one part of your investment goes down, another might go up, or at least go down to a lesser degree. Diversification can occur within a market (owning stock in both Coke and Pepsi), within an economy (owning Canadian mining stocks, banking stocks, manufacturing stocks, etc.), and also internationally (owning investments in Canada, the U.S., Europe, Asia, etc.).

Diversification is essential. It is also a lot of work. You want to pick a number of assets from different industries and countries, with varying levels of risk to make your portfolio relatively stable while also taking enough risk to get some return on your investment. Well good news: you can get others to do that for you. The downside is that everything comes at a cost. Which segues nicely into our next section.

Factor #2: What type of investment

Once you have chosen the right type of account for your situation you will want to decide what to put in it. Well, you have some choices. Once again there are trade-offs. Here is a list of investment types in order of lowest return (and risk) to highest.

A savings account

Technically I suppose this is also a “type of account”, but I’m putting it in this list here because you can get both TFSA savings accounts and non-registered savings accounts at your bank. Under most circumstances, I would not advise someone to keep a lot of money in a vanilla savings account at their local bank. The exception would be if you had some money that you absolutely 100% needed all of within the next couple of years. Most commercial banks in Canada will offer these accounts and most of them will offer 0.5-1.0% on these accounts. This isn’t very good, but still better than having your money in a chequing account that offers no interest. Want to do better? Skip the bank and open an account at a local credit union. Not all credit unions are created equal so you’ll want to do your research but their banking fees are lower and their savings accounts can offer more in the 1.5%-2.5% range, which is better than the banks offer.

Mutual Funds

Mutual funds are great for beginner investors. Why? Because someone else has already done the diversification for you. Mutual funds are managed to be balanced investments, so one share of a mutual fund is like a tiny basket of assets featuring investments in different countries, industries, and asset classes. But this management and balancing has a cost. This is why each mutual fund has a Management Expense Ratio (MER), which represents the cost. Most mutual funds will have an MER of approximately 2.5%, give or take. So what does this number mean? Well lets say your little basket of goods of a mutual fund appreciates by 7% over the course of the year. If the MER is 2.5%, then your investment returns will end up being 4.5% (7-2.5=4.5). It is this MER that gives mutual funds a bad name among many investors, because you’re not getting your full rate of return.

I would argue that if you’re a beginner investor who isn’t really sure what he or she is doing, then the MER is worth it. 4.5% is better than 1%, which is better than nothing. Really, savings of any kind is the most important thing, so complaining that you’re “only” getting 4.5% return is silly when you used to earn nothing on your money. The other great thing about mutual funds? Every bank or credit union or investment firm has them. All you need to do is approach a financial advisor or ask someone at a bank. They will then ask you a few questions to assess your risk tolerance and help you pick the fund that is right for you. Then you buy that fund (hopefully repeatedly and regularly through regular contributions) and watch your savings grow. In my mind, it’s more important that you save, rather than waste too much time worrying about exactly whose mutual fund is the best choice. Just buy one. If you find a better one, then at that point start buying that better one instead. Don’t delay!

Exchange Traded Funds (ETFs)

So let’s say you’ve been squirreling away your pennies into mutual funds for several years and watching your savings grow. You’re pleased, but also aware that maybe you have some colleagues who are talking about their own investment portfolios and they’re doing even better than you. Suddenly, you’re starting to question if that 2.5% MER is really worth it. Enter the ETF.

ETFs are actually similar to mutual funds in that they also represent baskets of assets. The main difference is that they are more focused, less balanced, less managed, and therefore have lower MERs. Maybe before, you were buying a single mutual fund with all your savings and it was doing everything for you. By switching to ETFs, now maybe you have to buy 3-5 different ETFs to achieve the same diversification that your one mutual fund gave you. So you have to do a bit more work yourself. On the other hand, you’re saving money now because while before you were paying a MER of 2.5%, now you’re only paying 0.2%. Your 4.5% profit based on 7% return has now become a 6.8% profit in exchange for you doing more of the work yourself.

But there is another catch, and it represents another cost to you. Recall that ETF stands for Exchange Traded Funds. That means they are traded on a stock exchange, like the NYSE or the TSX. How do you as an investor access those exchanges? You need a brokerage account. Getting brokerage accounts is easy enough. There are several to choose from. But the catch is you usually need to pay a commission for each trade. There may be some newer brokerages that have reduced commissions but in general in Canada the going rate is about $9-10 a trade. It might not seem like much, but think about the investor who tries to save $500 a month. Once a month, he goes to his brokerage and has to buy 3 ETFs (one for domestic stocks, one for foreign stocks, one for bonds). Once a month, he has to pay $30 in trading commissions. That’s 6% of his investment amount going to commission. And $30 a month can add up. Clearly, ETFs aren’t for everybody. This is why if you’re just starting off, mutual funds might be a better option for you since they’re less work.

(Worth mentioning: some brokerages will offer a list of commission-free ETFs. If you pick a brokerage that offers one and can come up with a nice asset mix, then the worry about commissions goes away.)

The other thing to keep in mind if investing with ETFs is that at least once a year you need to re-balance your portfolio. What does this mean? Well, let’s say you’re shooting for 70% stocks and 30% bonds. At the end of the year, let’s say your stock ETFs have outperformed your bond ETFs (the value of your stock ETFs has gone up by more than the value of your bond ETFs has).  The stocks in your portfolio now represent 80% of its value and the value of your bonds is therefore 20%. Now you need to buy relatively more of your bond ETF to get back to 70-30% and have things properly balanced. Again, this is something that the managers of mutual funds will do for you which helps to justify their larger MERs.

Individual stock and bond trading

You are confident in your abilities to pick a stock based on sound market principles. You know how to craft a well diversified portfolio to protect yourself against risk and maximize your return. You’re pretty sure you can beat the market. Congratulations! You’re far better at this than most people are. You are probably also not reading this blog entry right now. If this doesn’t describe you, then you should not do this. Stock trading is a great way to go broke and/or turn yourself off investing. Do not do this.

Final thoughts

One thing you’ll notice I haven’t done is recommend any particular funds or ETFs or assets of any kind. There are plenty of online resources for you to pick investments you think are worth buying. I like Canadian Couch Potato, so feel free to give him a try. But the online investing community is quite large and it’s typically pretty easy to find recommendations.

Everyone has their own things to consider. We all have to look at all factors. Why are you investing? When do you want access to your money? Are you looking for a way to reduce your tax bill right now, or is it not a huge problem for you? And crucially how much work are you willing to put into managing your investments? Hopefully for anyone who is able to answer all these questions for themselves, this blog post has been helpful. If not, feel free to ask me questions in the comments, via email, Twitter, or however you wish.

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Real Estate vs Investing Part 2: Time to talk about tax… wait, why are you running away?

For Part 1 of this post, start here if you would like to get caught up.

There are a lot of reasons why I like investing in securities. For one, you can invest as much as you need or can, in whatever increments you choose, and whatever frequency you choose. With a house, you need to save up enough for a down payment before you even get started. Then once you have a mortgage, you’re beholden to your bank’s mortgage payment schedule. If you happen to hit a rough patch and cash flow is tight, you still need to make those mortgage payments, or risk losing your property (and running into serious credit trouble). If you hold stocks, bonds or mutual funds, you can put a hold on investing if you find yourself short on cash for a while.

Do I think that real estate can be a good investment? Absolutely. But under the right conditions. If you have enough for a decent down payment and the rent you’re collecting is enough to cover your costs and be a source of monthly income for you, then that’s great. But consider this: in the meantime, while you’re saving for that down payment, why not put those savings into some securities and earn a little interest income on them so you can save your down payment faster? To me that’s win-win.

There’s one other issue that I must address here though, and that is tax. With a head nod to the Dividend Diplomats who did a good job here of pointing out the tax benefits of dividend investing, this is another thing to consider. For any non-Canadian readers out there, these specific considerations I’m going to mention might not apply to you, but rest assured that your own local tax jurisdiction will have its own points to consider for the tax treatment of certain types of income. If you’re in the US, that Dividend Diplomats link will be useful to you.

Let’s talk about tax

I live in Canada, so for me, any income I earn from rental properties is taxed as regular income, just like I would earn from a 9-5 job. So the additional income earned from rentals is subject to your marginal tax rate. I don’t want to get too technical here, but that basically means that whatever tax bracket you find yourself in will dictate the tax you pay on any additional dollars of income. Unless of course that income puts you in an even higher tax bracket, meaning the income you earn from that rental will be subject to even more tax than your regular pay. So while you thought your rental was making you an extra $1000 a month, it’s actually only earning you an extra $700 (assuming a 30% marginal tax rate). Still $700 more than you had right? Not bad.

Maybe now you’re thinking “but wait, can’t you deduct expenses from this income so your taxable income on that rental is lower?” Very good! This is true. In Canada, you can deduct the interest (but not any principal) from your mortgage payments on a rental, plus any maintenance costs, expenses like utilities if you pay them as the landlord, taxes, advertising expenses, etc. But you’ll still get taxed on whatever is left over at your marginal tax rate.

“But can’t you make it look on paper like the rental is losing money, so your taxable income goes down for the year?” Well look at you! You are a savvy one aren’t you? First of all, don’t commit tax fraud. You will likely get caught, and it makes you a bad citizen. Secondly, if you’re maxing out any and all legitimate expenses and deductions on your property and it shows that you’re operating at a loss as far as the taxman is concerned, then I’m afraid that means you’re not holding an investment that is earning you much money either. You can only fudge your taxes so much. Those expenses you deducted are real expenses! Your taxable income on your rental property will end up being pretty close to your actual income on your property once you have taken care of your expenses.

Now assume instead you held investments like stocks, bonds or funds. First of all, you could arrange to hold these investments in a tax deferred account like a RRSP (for my American friends, I think this is the equivalent to your 401(k)). This means that anything you put into this account will actually reduce your taxable income for that year. So all else equal, you’ll get a tax refund come tax time. Alternatively, you could hold your investments in a Tax Free Savings Account (TFSA), and in that case you will never have to pay any tax on any of the income earned from those investments, ever. Those are both pretty good options! But let’s forget them for now, because there’s even more good news.

Let’s assume for now that you hold investments in a normal, non-registered account and you have to treat everything normally from a taxation perspective. Say you own stocks. The only time you will have to pay income tax from holding those stocks is when you sell them. So if you’re buying and holding your assets and watching your savings grow over time, you don’t really need to worry about your net worth being taxed away as it grows. When the time comes for you to sell them and use the money, that income is treated as capital gains, not normal income. And while you will have to pay your marginal tax rate on those capital gains, you only have to pay it on 50% of those gains. So you’ve already cut your tax bill in half. Good for you!

Here’s an example: You buy some fund and later that year it has appreciated and you sell it for a profit of $1000. Your capital gains are therefore $1000, just like our previous example where we had $1000 of rental income. Of your $1000 capital gains, you only have to pay tax on 50%, or $500. If you’re the same person in our rental example who has a 30% marginal tax rate, then the government will take $150 (that’s 30% * $500), leaving you with $850 from your $1000 capital gains. You’re already ahead of the rental income guy by $150.

“But what about dividends?” Good question! If your stocks pay dividends then you will have to pay tax on that income in the year it is paid. But the dividend tax rate is 15%. So if your marginal tax rate is 30% for example, your dividend income is still worth more on an after tax basis. $1000 in dividend income will cost you $150 in tax, leaving you with $850. (The tax numbers are slightly more complicated than this, but I don’t want to get too deep into the taxation weeds and lose too many of you. Suffice to say that the actual numbers are close, and dividend income is going to be treated better by the tax man than any income earned on labour). In this example, taxes on dividends is the same as taxes on capital gains, but if your marginal tax rate is higher than 30%, dividends become more attractive, because dividend income is always taxed at about 15%. And again, remember that if your investment account is a registered TFSA, you will pay no tax on any of the profits.

I’m not trying to tell you that taxes are bad and that you shouldn’t pay your taxes. But let’s be honest while we’re at it and admit that nobody wants to pay any more tax than they have to. And taking advantage of these tax benefits is something that all taxpayers are entitled to. Nobody is pulling a fast one here. We’re just all trying to make the most with what we have and keep as much as we can while still playing by the rules.

“But you said your parents lost a bunch of money by buying stocks!” Yes I did, and that’s true. But the simple truth is they were doing it wrong. What my parents was doing was essentially gambling. They weren’t diversifying a portfolio or sticking with low risk funds. They bought a few stocks based on friendly advice, got unlucky, panicked and cut their losses. In other words, they did all the things you’re not supposed to do. Unfortunately they didn’t know any better. I have the benefit of learning from their mistakes. There are better ways to go about it. For example, you can buy mutual funds or ETFs and your risk will go way down. You won’t get rich overnight, but you should get a nice steady rate of return over the long term.

Finally, I do want to address that I realize for a lot of people, the idea of investing is completely foreign to them. They might like the idea in theory, but have no idea how or where to start. Real estate is just so much easier for a lot of people because they understand houses and rent. I get that, I really do. I will take some time in future blog posts to help explain things to my friends who don’t know the first thing about investing. If you have any questions about a topic you would like to know more about, please let me know and I will happily do my best to write a post about it.

For now, I’ll just say two things on the subject. First, it’s not as scary as you think, or at least it doesn’t have to be. Secondly, the sooner you start the better. There is a Chinese proverb about the best time to plant trees that often gets paraphrased for investing (thanks to My Own Advisor for helping me find the original source and quote): the best time to start was yesterday; the second best time to start is today.