Warren Buffett, renowned for his investment prowess, started investing at age 11. Surprisingly, 90% of his wealth was accumulated after he turned 60 – largely due to the magic of compounding.
Today, let’s explore essential principles for successful investing.
1. Compound Interest:
- Einstein called compound interest the eighth wonder of the world when he said that “he who understands it… earns it, and he who doesn’t… pays it.
- It’s simple but powerful. One way to think of it is linear vs exponential thin:
- Where linear thinking is 2+2+2+2+2 = 10 and exponential thinking is 2x2x2x2x2 = 32): Compounding magnifies returns.
Whether borrowing or investing:
understanding compound interest is a game-changer.
2. Debt vs. Investment
- We don’t always have a holistic view of our finances. We tend to frame things very narrowly in the sense that we will save and borrow at the same time.
- Historically, the stock market has averaged 10% returns (7% adjusted for inflation) over 100 years. If you have debt that costs more than 7%, prioritize paying it off before you start investing.
Don’t save and borrow simultaneously – especially high interest debt like credit cards and payday loans that charges you more than 20% interest.
3. Emergency Fund: Your Financial Safety Net
- Life happens, and unexpected expenses (like a sick relative or expensive car repairs) can arise.
- Before diving into investments, determine your ideal amount (e.g., $1k, $5k, or $10k) that can cover you in case of an emergency.
Create an emergency fund – having an emergency fund prevents you from prematurely withdrawing your investments.
4. Separate Insurance and Investment:
- This one may be controversial but let’s unpack it together:
- The primary purpose of life insurance is to replace your income if you pass away, and term life insurance is the most cost-effective option.
- But life insurance as an investment is a strategy salespeople push at people who want to protect their families and build up a retirement.
- Whole life policies, which combine insurance with an investment component, are expensive and provide poor returns. High fees, poor investment performance, and the risk of policy lapse make life insurance a bad investment.
Don’t mix insurance and investment. It is much better (cheaper) to buy a 20–30-year term life insurance coverage and invest the difference in a good growth ETF or mutual fund. Learn more here.
5. Start Investing Wisely
- Regular saving and investing allow compound interest to work in your favor.
- Start small and be patient – consistency matters more than the initial amount.
- Use tax-advantaged accounts like TFSAs or RRSPs (in Canada) or Roth IRAs or 401(k)s (in the USA).
- Automate your investments to match your payroll schedule for seamless execution.
- Open a low-cost investment account now. With a platform like Wealth Simple. You can use my referral code: TTO18Q and we will both get $25 when you fund your account.
Once you’re financially stable, invest 10-15% of your household income in low-cost ETFs or mutual funds with a track record of 10-12% growth over 10 years.
KEY TAKEAWAYS
To build wealth and secure your retirement while protecting your family, it’s best to avoid using life insurance as an investment. Instead, follow these steps:
- Get rid of debt: Ensure you are debt-free or pay off high interest debt and have a fully funded emergency fund before you start investing.
- Be wise: Avoid get-rich-quick schemes and “safe” options like gold or bonds, which don’t keep up with inflation. Instead, invest in good growth stock mutual funds.
- Start Investing: Once you’re financially stable, invest 10-15% of your household income in low-cost ETFs or mutual funds with a track record of 10-12% growth over 10 years. Use tax-advantaged accounts like TFSAs or RRSPs (in Canada) or Roth IRAs or 401(k)s (in the USA).
Bonus Tips for Investment Success
1. Understand Your Risk Tolerance
Assessing your risk tolerance is crucial. Generally, short-term deposits, bonds, and preferred shares are less risky than common stocks and derivatives. Knowing your comfort level with risk helps in making informed investment decisions.
2. Define Your Investment Objectives
Clearly defining your investment objectives is essential. Ask yourself:
- Do you want to preserve capital and earn income?
- Are you aiming to grow capital or prioritize liquidity?
- What is your investment time horizon (5, 10, 20, or 30 years)?
- How can you minimize taxes?
Having clear goals will guide your investment strategy.
3. Learn the Difference Between Trading and Investing
Understanding the difference between trading and investing is key. Tax implications vary based on the type of income and whether you’re classified as an investor or trader. Generally, traders pay more taxes than investors.
- Investors: Typically buy and hold assets for the long term (usually a year or more).
- Traders: Engage in shorter-term buying and selling of stocks and options.
Knowing these differences can help you optimize your tax strategy and investment approach.
Learn more about efficient investment strategies.
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The investing information provided on this page is for educational purposes only. I do not offer advisory or brokerage services, nor do I recommend or advise investors to buy or sell particular stocks, securities or other investments. You are responsible for all decisions you make, or any actions taken based on this content. Some of the links in this blog are affiliate links. If you make a purchase through these links, I may earn a small commission at no extra cost to you. This helps support the channel and encourages me to keep making content like this. Your support is very much appreciated. Thanks for reading and watching.
