I Don't Like Money

November 23, 2009 7:45 PM

I honestly have no interest in money, but I'm constantly reminded to invest my money. I've tried learning about it with little success, presumably because of my uncommon beliefs regarding money. So how do I invest this stuff so that I can maximize my joy in life and minimize my reliance on money?

I'm 21 and live in Canada. I'm going into my 4th year of university and yet I probably know less about money than a 15 year old. I was never taught anything about in school and I've never had any interest in it. We're working with an entirely blank slate here (to put it into perspective, I was asked by my bank cashier if I got money on my tax return last year and I didn't understand what she meant... I'm totally stupid when it comes to money :P).

I recently picked up a Personal Finance for Dummies book and a Complete Idiots Guide to Personal Finance. I also read The Wealthy Barber a few years back. All of these were totally over my head. Furthermore, I assume this is all outdated because of the recession or whatever. ;)

I think my problem is that I don't really care about money -- it just doesn't mean that much to me. I don't buy much, I don't have any debt, I don't have any real expenses, and most of it just sits around.

So, all that said, what do I do with this stuff? Which of the Bonds/RRSPs/RRIFs/GICs/ROFLs/BBQs accounts do I put my money in? Here are my basic interests:
- Lets make it an even $10,000 I want to invest
- I want to save for my retirement and use this compound interest thing
- I don't want to lose money. I'm happy with whatever I've got, but I want to minimize my reliance on money. I don't want to be working while I'm 65 just so my family doesn't freeze in the winter. The more time I can enjoy life, the better.
- I want the "set it and forget it" approach. I don't have enough interest to make this a hobby for me.
- I don't want to pay anyone and I want to understand and run things myself (I just need to know where to start)
- Locking 100% of my money away for retirement means I can't enjoy life while I'm young which is a waste. I want some money available for my often spontaneous ideas. ("Maybe I'll by a car tomorrow or go on a vacation next Thursday...")

I know a sound like a naive, 90-year-old grandpa still living out the Depression with his money buried in a coffee can in the back yard (I'm only one step above that... I don't even own a bank card yet), but I just have no idea where to start and not enough ambition to learn about financial stuff which changes from month to month.

I know these might be a unique situation (which is exactly my problem), but where would you begin? What would you do to make the ideal, simple way to invest $10,000? What are the only one or two concepts (RRSPs, etc.) I need to learn and use?

All ideas and suggestions are very appreciated! :D

posted by Kippersoft to work & money (22 comments total)

No-load mutual funds. Get a Vanguard account (or whatever) and dump your money in there. Many mutual funds will give you a checkbook, so you can always set up your direct deposit to go into your mutual fund account and backfill a checking account from it with whatever you need for the month. I'm not sure if any of this is US-specific, so YMMV.
posted by rhizome at 7:56 PM on November 23, 2009

Everything you need to know about investing in 129 words.

These instructions are basically correct. The problem with them is that they are too short for people who are interested in investing. But for someone who is not interested, they're perfect. Just understand them and follow them.
posted by alms at 8:00 PM on November 23, 2009 [10 favorites]

The simplest instrument for savings would be Canada Savings Bonds. They come in two versions; with the premium one, it uses compound interest.

Granted these will not give you a high rate of return (ie you will not make much money) but you're very young and you have a long time to save so it's a perfectly good option for right now. Savings bonds will introduce you to the basics of investing, and the interest you do make will be tax-free. You can buy them anywhere, including at your bank, and there is no fee.
posted by DarlingBri at 8:04 PM on November 23, 2009

While this isn't really completely hands-off, an easy and safe thing to do until you're ready to figure out an IRA and that sort of thing (you can worry about it later, really.) is CD laddering. Works like this:

You find some bank that does CDs. Could be online (for better rates) or local. You take your $10,000 and spend $2,000 on a one-year CD, $2,000 on a two-year CD, $2,000 on a three-year CD, $2,000 on a four-year CD, and $2,000 on a five-year CD. A year from now, you're going to get your $2,000 back plus interest. Now, your five year CD has four years left, so you take the money you got from that first CD and buy a five year CD. And you just keep repeating. Every year you just buy one more 5-year CD. The cool thing is every single year you're going to get $2000+interest handed to you, and if you had some expenses come up you could decide to just keep the money, or part of it. No worries about getting penalized for breaking the bank early.
posted by floam at 8:06 PM on November 23, 2009 [1 favorite]

(and of course, with CDs, if there was a huge emergency and you needed all $10,000 back, you could still do that but you'd get some penalties, lost interest, but you'll be able to get it all out).
posted by floam at 8:09 PM on November 23, 2009

So these comments that make reference to American financial products are not going to help this Canadian OP learn what to do with his money.

Seriously. Not a help at all.
posted by dfriedman at 8:11 PM on November 23, 2009

Sorry, managed to miss you live in Canada. In any event, I'm 99% sure they have CDs there but called Term Deposits.
posted by floam at 8:16 PM on November 23, 2009

Yeah, i wish they would teach personal finance as a life skill along the way.

I'm in the US, so this may be country specific (given that Canada has higher taxes but alot more is state-provided). However, this is pretty much what I do.

1. Establish a safety net - Make sure you have enough in a savings account that is readily accessible that you could live off of for about 3-6 months (since you're young, 3 months is prolly fine). Never ever touch this.

2. Figure out how much you can save - If you have a steady income, figure out how much you spend per month on your living expenses (necessary payments) and how much on average you spend on discretionary stuff. Add a % to make that a cushion. Subtract that from your total income. That's how much you can save per month.

3. Maximize your Roth IRA contributions - The Roth IRA is a really nice retirement fund with some great advantages such as being able to take out your own contributions without penality, using it for your 1st house, or using it to pay for a child's college education. Again, this is US specific, but at contributions of about $5K a year, its a pretty good deal. You can invest this in whatever you'd like depending on your level of risk.

4. ING Direct Savings Account - A portion of my paycheck goes directly into a high-interest yielding ING Direct Savings Account. They minimize their expenses by being an online only bank to give a high level of interest. It's variable (e.g., it fluctates with the market), but its pretty comparable to what you can get in a CD

5. Mutual Funds - Go after a no-transaction fee mutual fund, with a very low fee. Index funds are great (they follow the market directly and don't specialize). Contrary to all the financial marketers out there, index funds have proven to be extremely good given general markets over time. Good for setting and forgetting. If you feel riskier, feel free to put it into a particular sector or a mutual fund setup for Growth.

That's the way I do things.

Other Good Ideas:

CD Ladders - Stacking CDs is a nice way to have money available when you need it but still maximizing your return. Just do a quick google search on it.

Determining Goals - For the most part, you want to invest in a way that matches you goals. Do you specific want to retire early? Do you want to buy a house? Start a fund for your kids? Buy an awesome new car in 3 years? Figure out what your goal is and then establish a fund directly for that.

Don't Change Your Livelihood - Since you're 21, you're going to get a job and then start increasing your standard of living. Its best if everytime you get a raise, you don't spend more money but simply save more. Compound interest works in such a way that the earlier you save, the more money you'll have.

Automatic Investments - Once you figure out what you're comfortable with saving, setting up Automatic Investments with your bank is the best way to have money simply vanish from your account and into your investments. That way, you never look at your account and see all the money you have.

The things is, you're young, investing anything at such a young age is a Good Idea. In fact, if you pretty much just took $500/mo and started putting it in an interest yielding savings account, you'd be in pretty good shape. Don't worry about all the money you could be making, just start saving. If you feel more comfortable, start putting a portion into more risky investments. Just be comfortable with the fact that you could lose all of that money in the worst of situations.
posted by miasma at 8:16 PM on November 23, 2009 [1 favorite]

Thanks a lot everyone. This at least gives me somewhere to start from (looks like I'll be looking up what a CD is...). A couple clarifications:

- Indeed, I am Canadian and any Canada-specific advice would be much appreciated (although I'll try to research Canadian equivalences to U.S. concepts).

- Saving money is not a problem. I probably put about 90-95% of my pay cheques straight into the bank. It's just more of a matter of putting it somewhere.

- Is there anything I should avoid entirely? Does the current economy change the way I should invest my money relative to a couple years ago? (The economy "crisis" or whatever has had zero affect on me, but I'm referring to the overall general economy.)


>>Yeah, i wish they would teach personal finance as a life skill along the way.
I honestly don't know why they let me pass grade 12 without teaching me this stuff... but that's another issue entirely. ;)
posted by Kippersoft at 8:46 PM on November 23, 2009

Okay: RRSPs are great, but there is no point in taking the tax deduction right now. You can take the tax deduction whenever, so take it once you have more income. Your last income statement has the total you are allowed to invest in RRSPs.

TFSAs have some good advantages, too. I recall you are allowed to invest up to 5k in them per year. This is after tax, but the money that you take out at the end is not taxed. (Money received from an RRSP is taxed as income.)

You are looking at a long horizon. Look for index funds (mutual funds are fine for both RRSPs and TFSAs), and try to determine what your level of risk will be.

Depending on how much room you have in your RRSPs, I'd max the TFSA (your money is less tied up), then put the last 5k in an RRSP, but that's not necessarily the best advice for your circumstances. In any case you should take advantage of these options.

GICs are good if you think you will need the money on a shorter horizon, eg to buy a car, a house, law school, etc. (Note that you can take money out of your RRSP without penalty for a house or for school.)

You can go to your bank and speak to a financial advisor there. They will have advice. Listen, take all the booklets home, think about it, then decide.

Basically:

Max out your RRSP and TFSA contributions. (I assume you have a buffer of everyday savings in your account for 2 or 3 or 6 months of expenses.) An index fund will have the lowest fees. Your bank will help you decide on the right index fund for your level of risk. They will only give you funds that are eligible.
posted by jeather at 8:49 PM on November 23, 2009

One non-traditional answer you may not find here is this:

Consider investing in yourself.

Huh? Why should you do that? Let me put it into perspective for you...lets say you take $1000 and invest it in marketing a new business venture of yours that makes you $5000 over a couple months. Unless you are Warren freaking Buffet I seriously doubt you will find something else that makes you that kind of return. Now of course those numbers are completely pulled from nowhere but the point is, consider investing in something that is a bit more active, a bit less related to "investing" as you know and dread it, and something that has the potential to return a LOT more than traditional investing ever could.

While I cannot provide Canadian-specific investment advice, I can provide one other tip on making the whole process a lot easier. Set financial goals for yourself and use some pretty charts online to help track your results. Sites like Mint.com make it very easy to do and can give you a real feeling of progress that you are getting closer to your goals which is a lot more exciting and easy to get interested in than thinking "hmmm, my interest rate went up .1%"
posted by Elminster24 at 9:10 PM on November 23, 2009

TL;DR summary of what follows: Put a little bit of money in a low-cost 'target retirement date' index fund in a tax-free retirement account every paycheck. Put 'fun money' in a CD from your bank or in an after-tax index fund account. Don't touch the retirement account until you retire. Find an expert and pay them to review your plan and holdings.

You have conflicting goals that make answering this question difficult. The lack of knowledge about finance is not a problem but you'll need to figure out how to think about your goals.

"I don't want to lose money. I'm happy with whatever I've got, but I want to minimize my reliance on money. I don't want to be working while I'm 65 just so my family doesn't freeze in the winter. The more time I can enjoy life, the better."

You can meet the first sentence's requirement with a Certificate of Deposit available from any bank. They're insured up to 250 thousand dollars in the U.S.; I assume Canada has similar protections. They're very conservative and very safe. However, they don't pay very well and you'll have trouble reaching your goal of retiring at 65 with them.

In investing, better rates of return are compensation for taking on more risk, including possibly losing money. The primary way to expose yourself to more risk are via securities. The two common forms of securities are are stocks, which are a way of becoming part-owner of a company (hence 'share' and 'shareholder') and bonds, which are promises to pay an amount of money to the holder of the bond. With bonds, you are acting as a creditor to a company or government who want to borrow money now against future income.

Stocks are more risky than bonds, so they traditionally have a higher rate of return. You'll want to buy an index fund, which covers a large segment of the publicly traded companies so you don't have to try to figure out which companies' stocks to buy and sell. Bond index funds work the same way, but contain fairly secure (i.e. lower rate) bonds.

So, how much does the rate of return matter? Quite a bit. Assume a 4% rate for the CD rate and 8% for the riskier equity rate. Assuming you didn't add anything to your account after the initial $10,000 (I'm ignoring tax issues until later), after 45 years (when you're 65) you'll have $60,000 in the bank. Not bad, right? Well, keep in mind that inflation is going to have reduced the value of those dollars; 45 years ago, a car cost $2,000 and $10,000 was a lot of money. If you choose to invest in the stock market, you could have $360,000. Wow, right? Well, caveat time: that's not guaranteed. You could also have $5,000, or $50,000, or $500,000, or nothing at all.

- Locking 100% of my money away for retirement means I can't enjoy life while I'm young which is a waste. I want some money available for my often spontaneous ideas. ("Maybe I'll by a car tomorrow or go on a vacation next Thursday...")

There are many reasons to lock away your money. First, money that you spend now isn't going to be compounding. Taking out just $2,000 from your $10,000 now is going to reduce your return by $75,000 in 45 years at the 8% rate of return.

Second, if you don't have the money in a tax-free retirement account, the government is going to consider that income and tax it as such. Assuming a 33% tax rate on investment income, you'll only make $110,000 over 45 years, costing you $250,000 over the retirement account! For the CD account, you'll only have $33,000, costing you ~$30,000.

Third, you're young! You don't need money to enjoy your youth. :)

So what should you do?
0) Pay off any loans that you have that you are paying interest on. The $300 you'd get from a $10,000 bank CD in a year is less than the $2,000 you'd pay in the same year on $10,000 in credit card debt. If you can't pay them off, pay as much down as you can. Set aside enough money to pay 6 months of expenses in a checking account (to cover emergencies.)
1) Put your surplus cash in hand in a retirement account, assuming that's less than the max per year you can invest tax-free.) If it's more, contact someone familiar with the Canadian tax code to figure out how to spread out your contributions over multiple years.
2) Take that money, buy something like the Vanguard Target Retirement Date Index fund. It is a combination stock and bond index fund. It pools your money and invests in a large number of stocks and bonds. You select the target date you want to start withdrawing the money (your retirement date, e.g. 2050) and they make sure that you have the right blend of stocks and bonds to match the risk you should have relative to your distance from retirement. For extra credit, split this purchase up and spread it out over several months to avoid buying your shares at the same price. This is called dollar-cost averaging; it's important for long-term investing.
3) Figure out how much you can afford to put away to retire per month, then set that to be automatically debited from your paycheck (or, failing that, your checking account.) Automating it is a good way to guarantee that you're growing it regularly. This makes a HUGE difference. If you can afford to put $1000 away a year, your 45 year return in the tax-free stock market account becomes $805,000! That's an additional $430,000 for only $45,000 more invested. You're also dollar-cost averaging every two weeks for 45 years which will protect you from buying in at the wrong time.
4) Put fun money that you don't invest in a retirement account in bank CDs for money that you want to guarantee that you have (six months of expenses, for example.) You could also set up a second investment account that is more flexible (but taxable,) but that may be too complicated for your comfort level.
5) Talk to an accountant or financial planner who is familiar with Canadian tax law. Try to find one that works on a fee for work done basis rather than on commission from mutual fund companies. You want them to choose the best options for you rather than the options they are paid to sell you.
posted by theclaw at 10:07 PM on November 23, 2009

on preview, as everyone has said, any savings when you're 21 is fannnnntastic thanks to the wonders of compound interest.

i'm in a similar case to yourself, and i found it extremely helpful to consult with a financial planner who could explain this clearly to me. i was able to talk to a planner who doesn't work on commission and i felt like he explained things to me on a level i could understand and acted in my best interest since he wasn't pressuring me to choose a particular fund/stock.

here's how the planner helped explain the many many different choices out there:

in canada, there are two main ways to save your money that the government has set up to help you out: tax-free savings accounts (TFSAs) and registered-retirement savings plans (RRSPs).

TFSAs are designed to help encourage younger people to save, while RRSPs help encourage middle aged people to save for their retirement.

both of these are just "savings vehicles"-- they are just designations for tax purposes. you can have TFSAs or RRSPs in the form of mutal funds, stocks, savings accounts, etc. right now, everything pretty much sucks for how much interest you stand to make, so

the difference between the TFSA and the RRSP is all about taxes. in a TFSA, you invest post-tax income, which since you are young and presumably not making very much, is not much of a loss. then, any gains (interest) you make on the investment is tax-free. so if you save up a whole bunch of money and then want to buy a car/house/vacation, you can withdraw the money whenever you need it without having to pay a tax penalty. the cap for a TFSA is $5000/year, though that is cumulative (ie, if you take the money out you're able to later build the tax-free capital back to what it would have been).

in an RRSP, you invest pre-tax income. in the future, when you have a well-paying job and will be paying a much larger percentage of your income towards taxes, this lets you reduce your taxes. but, the catch is that you have to pay taxes on that income (and any gains) when you want to get at it. this ideally works for someone who gains the tax benefit when they are middle-aged, then uses that money to retire when their income potential is reduced.

i wound up going with a TFSA in a GIC as well as a (relatively) high-interest savings account. both of which are a few steps away from my chequing account, so i can't blow it all on eBay and energy drinks. neither of them are particularly high-interest, but there isn't a ton out there that is right now either.

honestly, right now the most important for your financial future is working on building up a savings habit. whatever form it takes isn't crucial.
posted by beepbeepboopboop at 11:24 PM on November 23, 2009

Talk to one of those financial advisers who works on a fee basis (opposed to commission on all the crap they sell you). Talk to enough of them until you feel comfortable.

If not losing the principle is an issue for you, mutual funds are not a good suggestion. (In the short term, any way. My completely hands off 401k lost 17% in ONE DAY late last year, but is actually up 3-4% for the 10/1/08 - 10/1/09 time period.)

The 129 word investment advice is good. Here's the thing: capitalism is about rewarding risk. You "risk" 8 hours of your time, you get 8 hours of money. That's as low risk as you can get. The more you risk your capital, the more potential reward you get. Bank savings accounts are almost no risk, and they pay low interest. The bigger the chance you can lose all your money, the bigger the chance you can make a ton of money. All things being equal. So what you need to do is balance your need for money now with your need for money later with your tolerance for risking losing that money. It's like horse racing. If you bet the top three horses to show, you are darn near guaranteed to at least break even. If you bet the superfecta, you are pretty much guaranteed to lose your money. The difference is that if you are lucky, the first bet *maybe* doubles your money. Where the second bet pays thousands on the dollar.
posted by gjc at 3:28 AM on November 24, 2009

RRSPs are not just for middle aged people. Due to the wonders of compound interest, they too should be started when young. In order to encourage that, you can take the tax deduction from investing in an RRSP whenever you like. This is a poorly known fact. If you invest 5000 in your RRSP this year, you can take the deduction next April, but you can also take it in April of 2015. Do not wait to invest in an RRSP just because the tax deduction is more useful when you earn more money.
posted by jeather at 5:44 AM on November 24, 2009

If you're interested in learning how to set up your money in such a way that you have enough to enjoy yourself, get on track for healthy savings for the future, and yet not actually have to spend much time doing anything about it, I'd recommend Ramit Sethi's blog posts on automating your money. He also has posts on how to invest without getting into picking stocks and all that malarky. Do read the posts by category though, because it sounds like the entrepreneur or cut-costs-on-your-phone-bill stuff won't be relevant to you.

Sethi is about conscious spending, rather than random keeping-up-with-the-Joneses or being frugal for the sake of being frugal. Money is there to help you reach your goals and be happy, it's not an end in itself. His advice is US-centric, but I'm an Aussie and I found it easy to understand the principles first and then figure out the equivalent here.
posted by harriet vane at 7:24 AM on November 24, 2009

If I could go back to your age, I'd put away money in a term deposit (or any low risk, 5 to 6 year term investment) and save up a down payment for a house or condo. I didn't start doing this until I was 26. You could start by maxing out a TFSA and then put the extra into a term deposit or some sort. The main reason I recommend real estate as a goal is that when you pay rent (you don't say how you live, but I'm assuming you're in an apartment), you're giving away money to a landlord. However, when you're paying back a mortgage, you're paying off (usually good) debt to yourself. This may have changed due to the market changing or the particular market of your city, but when I got my first house, my mortgage payment was $200 less than rent, and then money is helping me rather than some landlord.

Another good investment worth saving up for, or otherwise spending your money on (in addition to any grants you manage to secure): graduate education (if you know what you want to use it for). This is an investment in yourself.

Go to your financial institution (and a competing one, if you want to be sure) and they should be to choose some savings products that are right for you, and match the level of risk with which you're comfortable.

Is there anything I should avoid entirely?

Investments you hear about via anonymous e-mails. Those are generally always bad.
posted by Kurichina at 8:14 AM on November 24, 2009

You can buy mutual funds or other investment funds that are socially responsible. That means they don't own stock in companies that make landmines, etc. You might make less income.
posted by theora55 at 10:07 AM on November 24, 2009

Really work on trying to understand Personal Finance for Dummies because it is quite sound, and the bulk of the advice is perennial and still good advice despite the recession.

You may also benefit from reading Your Money or Your Life.
posted by Jacqueline at 12:30 PM on November 24, 2009

Thanks everyone! Every answer has some great ideas. I'll be returning to this page for the next couple weeks while I figure this all out. :)
posted by Kippersoft at 6:59 PM on November 24, 2009

Here's some more general advice. I've always, always saved. Which meant I could afford to sell my car and take a trip overseas and backpack around, learning a lot, and changing my perspective, so a pretty good investment, though I didn't think of it that way. Several years later, savings meant I had some cushion to live on and I borrowed a bunch of money and bought a business, ran it for 5 years, and sold it. Learned a lot more, and built up equity. Saving for retirement is a good idea, but also invest in yourself. Not in cds and videogames and a cool car, but in education and experience. I'm really sorry I didn't invest in a graduate degree when I was younger, and I may still.
posted by theora55 at 9:12 PM on November 24, 2009

Check out The Lazy Person's Guide to Investing (probably available at your library). Note: you DO NOT need to read the whole book. Just skim it, and in particular look at the various "lazy portfolios" they present. The takeaway: a handful of indexed mutual funds (they specify which ones) are your best best for whatever amount of money you want to invest in the stock market.

Something that works well for me: pick an amount of time you're willing to dedicate to your finances. 10 minutes a week? An hour a month? 2 hours a year? The point is, you don't have to spend hours and hours and hours of your life on this. Set it and forget it can actually work really well for investing - take an hour or two once a year to make sure you're on track, and then forget about it the rest of the time. Watching the market obsessively triggers a lot more emotion-driven mistakes than simply putting your plan into action and checking up on it every now and then.
posted by kristi at 2:25 PM on November 25, 2009 [1 favorite]