×

Understanding yourself

Why do people spend more time buying a new car or planning a vacation than investing their life savings?  Most people know they should play a more active role in their investments but they often don’t know where to start.

Investing simply means putting your money to work for you with the expectation that it will increase in value in order to meet future financial goals. For many Canadians, investing is not only prudent – it’s a necessity. So the first place to start when considering investing is to understand yourself as an investor.

There are a few things you will want to ask yourself before you decide to invest your money, such as:

    • How comfortable are you with managing your investments on your own? What is your risk tolerance? Is investing right for you at this time?
    • What do you want your investments to do for you? What are your financial expectations in the short- and long-term? What financial goals are you trying to accomplish?
    • Do you know how much you can comfortably invest?
    • Do you know the financial terms associated with  the investment products being offered to you?

Know your investor profile

Before you invest, it’s important to understand what kind of investor you are – which means knowing how comfortable you are with risk, your time horizon and your financial knowledge.

Start by determining what your risk tolerance is. High returns usually come with high risks—there’s no such thing as a high-return, risk-free investment. If you want higher returns, you need to be prepared to accept the risks that come with them. This is key to being able to assess how an investment fits with your investment goals and making suitable and educated investment decisions.

Check your risk tolerance

Your time horizon is a key factor in choosing investments. A time horizon is essentially the time frame you expect to hold an investment to meet a specific goal. For example, if you’re investing for the short-term, say for a vacation, you may want to choose investments that guarantee your return, so your money is there when you need it. If you’re investing for the long-term, like your retirement, you may choose to take on more risk early in your investment journey in order to grow your money faster. But remember, with higher-risk investments there’s a greater chance you could lose some or all of your money. It’s key to understand your goals for both the short- and long-term and finding the right balance of investments to meet them.

To get a good feel for yourself as an investor, take our Investing basics quiz. It will help you consider everything from investment fees and financial goal planning through to assessing your risk tolerance and the legitimacy of any investment offer.

Know your financial goals

Next, it’s important to assess how an investment fits within your financial goals. Are you looking to pay off debt, save for a future expense or grow your wealth? Perhaps it’s some combination of all three. Ask yourself:

  • What are your financial goals?
  • What do you want from your investments?

Where you are in your life stage is important, as every stage will have different goals and needs – and therefore different uses for money. Are you just starting out and looking to fund college or university? Buying a house? Starting a family? Saving for retirement? Starting retirement?

Depending where you are in life will dictate very different goals for your money and investing decisions. In order to plan for this, you need to be aware of what money you have coming in that will align with planned and unplanned life events. Part of the planning process involves identifying your priorities, tracking spending, setting a budget and managing money with an eye to the future and retirement.

Make a financial plan

A financial plan looks at where you are today and where you want to go. It defines your short- and long-term financial goals and is essential to achieving them.

Having a clear and accurate sense of your income and spending is the foundation of your financial plan and future success. The first step in making a financial plan is to create a budget. At the same time, determining your net worth can help you assess your financial health and spending habits. Combined, this information will help you to identify opportunities for saving, investing and for making adjustments to your lifestyle that can enhance your financial security.

From your budget, you can then determine how much to invest to achieve your goals. The key is knowing what kind of investor you are and creating an investment plan that is appropriate for you. Our video on how to create a financial plan will help you make a solid strategy for your future.

Know how to invest wisely

Now that you have a plan, where are you going to invest your money? There are a lot of ways you can invest your money. Stocks (shares), bonds, mutual funds or real estate?  Each has its own pros and cons, and it’s important to know what the differences are in order to choose an investment that’s right for you. Do you understand basic investment terms? Do you know the difference between different investment options such as RRSPs, LIRAs, RESPs, TFSA, ETF? Do you understand risk versus return?

The best financial decisions are informed ones. If you are unsure of or confused by some financial terms, or are new to investing, there’s a number of resources available to help you increase your knowledge:

Do you think you know the right steps to take to protect your financial future? Take our Are you an informed investor? quiz and find out if you know how to check, protect and then invest. Make sure you know the signs and red flags of investment frauds and scams. Remember, if it seems too good to be true, it probably is!