At one time or another, you may have heard the familiar Ecclesiastes verses, “There is a time for everything and a season for every activity under heaven: a time to be born and a time to die, a time to plant and a time to uproot.” I bet you never thought this could apply to your investments.
Throughout life’s journey, your reasons for saving will vary. You save for a vehicle, children’s education, retirement, home renovations, and vacations. No doubt your list is endless. The important strategy is choosing the appropriate investment vehicle and type of investments. This is where the confusion begins. Investment vehicles are different from types of investments. Investment vehicles, Registered Retirement Plans, Tax Free Savings Accounts (TFSA), and Non-Registered Accounts, have specific features and benefits. Once you understand their uniqueness, you can determine a suitable fit for you.
One way to explain investment vehicles is to associate them with the automotive industry. We understand the differences between a truck, car, and van. Each one services our needs differently. You may require a truck for work, a car for family purposes, and a van for travelling with young hockey players and their equipment. You may prefer one versus another specifically because of fuel mileage, comfort, or safety. Whatever your reason, you match your choice to your need. Therefore, if you can relate investment vehicles to the vehicles you drive, you will be one step closer to differentiating Registered Retirements Plans, Tax Free Savings Accounts, and Non-Registered Savings.
Another element which adds to the confusion is the types of investments held under the respective investment vehicles. The diagram above shows that the types of investments are the same. Whether you strictly hold GICs (Guaranteed Investment Certificates), specific bonds, stocks, or mutual funds will depend on your time horizon and risk tolerance. Again, consider types of investments linked to automotive industry as a “make” of vehicle: Ford, General Motors Canada (GMC), Toyota and Honda. They’re different makes yet you can purchase either a truck, car, or van. GICs, bonds, stocks and mutual funds, are all different investments, yet you can purchase them as a Registered Plans, TFSA, and Non-Registered Accounts. Once you grasp this analogy, your choice of appropriate investments will be easy.
In order to choose the right investment vehicle, you need answers to these questions:
What is your purpose for saving? This crucial question is important for your plan to succeed. Money set aside for retirement is invested differently than money set aside for emergencies.
What is your annual income today and what will be your annual income in retirement? This important information determines whether utilizing a Registered Retirement Savings Plan is preferred over the Tax Free Savings Account.
Understanding the investment vehicles’ distinct features helps you identify the benefit you can derive from its use. Just as your vehicle has special “must-have” features like cruise control, 8-way power adjustment driver’s seat, and push button start, your investment choice also has special “must-have” features. The chart below explains some of the features to help you determine whether you can benefit from each specific investment vehicle.
