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- 1: to commit (money) in order to earn a financial return
- 2: to make use of for future benefits or advantages
At its simplest, investing is just a way of making your money grow. When we invest in something, we do so with the anticipation and trust that the investment will return something to us. The same is true of investing in our education, our family, our health, and our relationships.
There are two key reasons why investing makes sense. Investments are a way to help you meet your financial goals and are a hedge against inflation. These goals may be short-term - which may require less money to achieve - or long-term, which generally involve some planning.
Investing requires that you:
- have a timeline in mind
- have some idea of what types of investments you would like to make
- know how much money you're going to need to reach your goals
- recognize that you may have some short-term financial needs
- understand asset allocation
You must also determine whether the investment you are making is one that you will need to live off in years to come.
Your knowledge of investing, whether limited or sophisticated, will have some bearing on how you plan. Likewise, your tolerance for risk will influence your decisions, as will your personality - are you conservative, moderate, or aggressive? And finally, you must have a financial strategy in mind before you begin investing.
Thoughtful investing means creating a plan and selecting investments that meet all of your goals. Although most people would say that their primary reason for investing is for retirement, there are also reasons to make short-term investments.
- Save and invest 5-10% of your income...
- Your investment decisions should be based on your needs and the long-term fundamentals of what you're buying...
- Don't make investment decisions based on emotion...
Registered Retirement Savings Plans (RRSPs) are intended to help you save for retirement - and by placing your investments within one (or more - there is no limit to the number of plans you may hold) - you create an immediate tax deduction, based on the amount of the contribution you have made. You also benefit from tax protection for any return you realize on these investments until you withdraw the funds at retirement age. You can select a wide variety of investments for your self-directed RRSP, including Treasury Bonds, Guaranteed Investment Certificates (GIC), stocks, bonds, mortgage certificates, and mutual funds. Mutual funds, which are sold in shares, are available as several different types:
- bond funds, which invest solely in bonds
- balanced funds, which invest in both stocks and bonds
- money market funds, which hold short-term investments
- equity funds, which invest in both Canadian and foreign stocks
Another investment vehicle, which you can select for inside or outside of your RRSP, is real estate. Buying your own home makes you a real estate investor, as does buying an investment property, and investing in a real estate investment trust.