This investing stuff sounds confusing…
Reading books, opening brokerage accounts, learning about RRSP’s, TSFA’s, ETF’s…
Why not just cut back on expenses, save some money every month and put it in the bank where I won’t risk losing any of it?
Heck, why not just open one of those ING Savings accounts and earn some interest on my savings risk free? The website says they have paid out over 5 billion in interest. That must be good, right? One problem…
You have a hole in your bucket!
Imagine that you had a big bucket and you were putting all your extra coins in there to save for the future. Now imagine that bucket had a small hole in the bottom and 3.26% of your money poured out every year, never to be seen again. I imagine you might want a new bucket!
That hole in your bucket is called inflation and in Canada it has averaged 3.26% between 1915 and 2010. It was last reported in Sep. 2011 as 3.2%.
I don’t mean to pick on ING, because they really do offer a higher interest rate than most banks, but right now even they only offer 1.5% interest on their savings account. So if you are earning 1.5% interest and inflation is currently 3.2% you are actually losing 1.7% of your money every year!
Not good. But wait it gets worse…
You actually have 2 holes in your bucket!!
There is another hole in your bucket right next to the hole called inflation. This hole is called “taxation”. That 1.5% interest is considered income and must be declared on your tax return at the end of the year. That’s right, you are now going to be fully taxed on that interest you earned further reducing the 1.5% interest you earned. Unless of course you hold this investment in a TFSA (tax free savings account).
Think of money as a stream of water. There is no standing still. There is a flow going one direction (inflation) and if you stand still you will be going backwards. You need to be swimming at least faster than the current coming at you.
Taxation and inflation are key issues you always need to examine with any investment. The kind of investing I do increases it’s payments every year to take into account inflation. I can also receive up to $22,000 a year without paying any tax.
In future posts I’m going to teach you how to invest like this. Then you will be swimming smarter, not harder!
Please consult with an investment professional before making any investment decisions.