Investing: what your money can own

Your salary became take-home pay in Part 1. Since then it has been given a bank account, an order of operations, a tax rule and a housing decision. Investing is for whatever is still there after the bills, the card and the emergency fund. In this example $4,195 arrives each month in Ontario; call it $839 a month for something long-term, just as a starting point.

Saving and investing answer different questions. InvestingInvesting means using money today to buy an asset that may become more valuable or pay income over time. means accepting that the balance will bounce around, in exchange for a chance to grow. A savings account keeps the dollar amount steady and reachable. A stock or fund can go up, go down, and do both several times before you need it.

So the first question is never “what should I buy?” It is “when will I need this money?” Being 28 is a hint about a long horizon, but the date of the goal matters more than your birthday.

The account and the investment are two separate decisions. A Tax-Free Savings Account, or TFSAA Tax-Free Savings Account is a Canadian registered account where contributions are made with after-tax money, investment growth is generally tax-free and withdrawals generally are not taxable., is a set of tax rules. Despite the name, it does not have to hold savings. It can hold cash, a GIC, a stock or a fund.

Part 4 separated the wrapper from what goes inside it. Keep that split: the account changes the tax; the investment changes how the balance moves.

Money can sit as cash in a savings account or a Guaranteed Investment Certificate, usually called a GICA Guaranteed Investment Certificate is a deposit that pays a stated return for an agreed term. Its access and early-cash-out rules depend on the certificate.. It can lend through a bond. It can own a slice of a company through a stock. Or it can buy a basket of all of those through a fund.

Each does a different job. Cash is for access. A GIC is for a fixed term at a fixed rate. A bond pays interest while its price moves a little. A stock can grow a lot and swing a lot. A fund holds many of them at once, so it behaves like whatever is inside it.

Two kinds of protection get mixed up. The Canada Deposit Insurance Corporation, or CDICThe Canada Deposit Insurance Corporation is a federal Crown corporation that insures eligible deposits at member institutions when an institution fails., covers deposits, cash and GICs, up to $100,000 per category if the bank fails.

Stocks, bonds, funds and crypto are not covered by anyone. Their value comes from the asset itself. The Canadian Investor Protection Fund, or CIPFThe Canadian Investor Protection Fund may help return eligible property missing from a member investment firm after insolvency. It does not cover a market loss or a poor investment choice., solves a different problem: if your brokerage goes bankrupt and your investments go missing, it helps get them back. It never covers a price falling.

An investment can pay you three ways. InterestInterest is money paid for lending your money. Savings accounts, GICs and bonds can pay interest. is what you get for lending. A dividendA dividend is a payment some companies make to shareholders. It is not guaranteed and is only one part of an investment’s total return. is a share of profit some companies pay their owners. A capital gainA capital gain is the increase between what you paid for an asset and what it is worth or sells for. It is usually unrealized until you sell. is the asset being worth more than you paid.

Price change plus income is your total return. Buy a share at $40, it rises to $50 and pays $2: that is $12 on $40, or 30%, before fees and tax. If it falls to $30 and pays nothing, you are down 25%, and nothing obliges it to recover.

A stock is a small piece of a real business. Ten shares is not ten products or ten dollars from the till. It is ten tiny slices of the whole company, owned alongside everyone else who holds shares.

The share price alone does not tell you how big a company is. You need the number of shares too. One billion shares at $10 is a $10 billion company; ten million shares at $100 is a $1 billion company. That total is the market capitalization, and it is why a $5 stock is not automatically a bargain.

A fund pools money from thousands of people and buys a whole collection at once: Canadian stocks, global stocks, government bonds, or a mix. An exchange-traded fund, or ETFAn exchange-traded fund is a pooled fund whose units trade on a stock exchange. One unit can represent a small interest in many holdings., trades on the stock exchange all day. A mutual fund is priced once, at the end of the day.

Some funds have a manager picking what to hold. Index funds just follow a list, like the 500 biggest American companies, for a much lower fee. The fund is only the basket: a broad stock-and-bond ETF and a crypto ETF are the same structure with completely different risk inside.

Owning hundreds of companies through one fund is diversification. When one company fails, it barely dents the basket.

Buying a bond means lending money to a government or a company. They promise regular interest and your money back on a set date, the maturityMaturity is the date when a bond or other term investment is due to repay its principal under its terms..

A bond can lose market value while the borrower keeps paying. If you hold a bond paying 3% and new ones pay 4%, nobody will pay you full price for yours. Longer bonds swing more, because more of their payments are far in the future. And a borrower offering a high rate is paying you to take a risk that they might not pay you back.

Compounding is growth earning its own growth. Put $1,000 into something earning 5% and year one adds $50. Leave the $1,050 there and year two adds $52.50. Same rate; a bigger pile earning it.

Regular deposits feed it. $250 at the end of every month for 40 years is $120,000 of deposits. At a steady 6% a year that grows to roughly $498,000 before fees and tax. Real markets do not deliver 6% in a straight line, which is why the tool lets you change the number.

Inflation shrinks what a dollar buys. If your account grows 3% while prices rise 2%, the balance went up but you can only buy about 1% more. That 1% is the real returnReal return is the growth of your money after allowing for inflation. It is closer to the change in what the money can buy.; the 3% is the nominal return.

Cash is the right place for money that has to stay steady and reachable. For a goal 25 years away, cash quietly loses to prices every year it sits there.

Fees come straight out of your balance. A commission charges you to buy or sell. An advice fee pays a person. A fund's management expense ratio, or MERThe management expense ratio is the fund’s annual operating cost, expressed as a percentage of its value. It is taken inside the fund, so you may not see a separate withdrawal., is taken inside the fund every year, so you never see it leave.

One or two percent sounds small. It repeats every year on a growing pile, and every dollar paid in fees is a dollar that stops compounding for you. A higher fee can be worth it when it buys advice you actually use. Just compare what you get with what it costs in dollars, not percent.

Risk is more than a falling line. Market risk is prices dropping. Permanent-loss risk is a company that never comes back. Inflation risk is growth that trails prices. Concentration risk is too much riding on one company, industry or country. Liquidity risk is not being able to sell when you need to. Currency risk is a US investment moving with the exchange rate.

Your risk capacityRisk capacity is how much loss your plan can survive without missing an essential goal. is how much loss your plan can absorb. Your risk toleranceRisk tolerance is how much uncertainty and temporary loss you can emotionally handle while staying with a plan. is how much you can watch without selling. A secure job and a 30-year horizon give you capacity; only you know your tolerance. A portfolio only works if you can live with its bad months.

Losses and gains are not symmetrical. A 30% fall turns $10,000 into $7,000. Getting back to $10,000 from there takes a 43% gain, because the climb starts from the smaller number.

Keeping up your monthly deposits during a fall does not undo the loss on what you already had. It buys more units at lower prices, which pays off only if a diversified fund recovers, as broad markets historically have. A single company might not. Money you need within a few years should never depend on a quick recovery.

A home gives you somewhere to live. Part of each mortgage payment builds equity, and the home may rise in value. It also costs interest, property tax, insurance, maintenance, and a lot to buy and sell.

A diversified fund is easy to buy or sell in small pieces and spreads your money across thousands of companies in many countries. A home is one property in one neighbourhood. It looks calmer only because nobody prices it every second. Part 6's rent-versus-buy comparison is the honest way to compare them.

Ask each pile of money one question: when do you need it? Emergency cash could be needed tomorrow. A down payment has a date three years out. Retirement money has 25 years. The firmer the date, the less loss you can afford near it.

Short dates get cash or GICs. A GIC ladder spreads the money across several maturity dates so some is always coming free. Long dates get a diversified fund, usually a mix of stocks and bonds. The mix follows the date, not a personality label like aggressive or conservative.

Once you know the goal and the account, there are three ways to run the investment. A self-directed brokerage: you pick and maintain it yourself, cheapest. A robo-advisor: software builds and rebalances a portfolio for a small fee. A human advisor or planner: more expensive, useful when tax, retirement and estate questions pile up.

Whichever you choose, know what it costs and what you get. “Financial advisor” is not a protected title in most of Canada. Before money moves, check the person's registration, what they are allowed to sell, and how they get paid.

The tax accounts matter because they change what happens to investment income. A Tax-Free Savings Account, or TFSAA TFSA generally lets investments grow tax-free and lets withdrawals come out without tax. Contribution room is tracked separately and withdrawn room generally returns in a later calendar year., is the flexible one. A Registered Retirement Savings Plan, or RRSPAn RRSP generally gives a deduction for eligible contributions, shelters growth while money remains in the plan and treats withdrawals as taxable income., gives a deduction now and taxes withdrawals later. A First Home Savings Account, or FHSAAn FHSA is a registered account for an eligible first home. Contributions are generally deductible and qualifying withdrawals are generally tax-free., gives the deduction and a tax-free withdrawal for a first home.

A non-registered account has no shelter, so interest, dividends and capital gains show up on your return. None of the accounts changes the risk: a stock can fall inside a TFSA, and cash can sit doing nothing inside an RRSP. Part 5 shows where the deduction lands when you file.

Before real money goes in, the checklist is short. Name the goal and its date. Keep emergency and near-term money out. Choose the account. Choose a mix. Know every fee. Decide how you will keep it running. An automatic monthly deposit removes the need to decide again every payday.

Then connect it to the bigger picture. Public pensions and a workplace plan may cover part of retirement; your own investing covers the rest. Part 8 puts those three together, and Canooq's calculators let you change the assumptions instead of trusting a number because it looks precise.