Caroline says she’s in a good place financially and has been a diligent saver throughout her life. The 33-year-old public relations employee makes $67,000 a year, is debt free and has put away a decent amount over the last decade. But she doesn’t know where to go from here and where to invest her money.
For years Caroline says she has been storing up cash with the help of family members.
“I thankfully don’t have any debt and I have about $80,000 in savings from family and working over the years,” Caroline says.
“I’d like to get into investing, stocks, retirement planning — but I don’t know what direction to go in.”
She tries to make most meals at home but December has been a hard month to stick to a budget because of the holidays and celebrations. Over the weekend, she and her boyfriend have quiet nights in and low-key gatherings with friends. “Nothing crazy,” she says.
Caroline recently adopted a kitten and “taking care of her is more expensive than I expected,” so she is looking into whether she should get pet insurance.
What’s the best strategy for Caroline to start investing and saving smartly for her future? We asked her to share two weeks of spending to get a better idea of her expenses.
The expert Jason Heath, managing director at Objective Financial Partners.
Caroline has been saving and with a little help from family has put away about $80,000. Hopefully that money is in a TFSA account, now that interest rates have popped up. There are promotional offers for savings accounts at over five per cent and regular high interest savings account rates from online banks are in the three to 3.5 per cent range. She will lose about a third of her interest income to tax, based on her salary and tax bracket, so a TFSA account for her is the bare minimum she should be doing.
She does not have a specific saving goal she is working toward but wants to start investing in stocks and planning her retirement. Stocks may be the best way to save for the long run but there would be nothing worse than for her to invest $80,000 into stocks, see it turn into $60,000 during a bad year for the markets, panic-sell and lose a bunch of hard-earned money. I think the best thing Caroline can do is to start to learn about stocks and the stock market before investing so she is buying stocks on purpose and knows the short-term risks that are a tradeoff for the long-term rewards.
Stock markets can go up and down a couple of percentage points per day and can be up or down double-digit percentages during a given year. Over the long run, they tend to generate high single-digit returns. Individual stocks can be even more volatile and that is one reason to make sure you have a diversified portfolio of stocks. An investor should probably own at least 20 individual stocks. Mutual funds and exchange traded funds may give an investor access to hundreds or even thousands of individual stocks. Fees are important too, and unlike other products and services, paying higher investment fees may not result in a better outcome.
If Caroline wants to start putting away some money for retirement, an RRSP can be a good option. Contributions generate tax refunds and withdrawals can be taken in retirement when she may be in a lower tax bracket. She may not want to overcommit to saving for retirement if she determines she has other short- or medium-term goals like a home purchase, a wedding or something else.
She seems to have mastered the most important part of investing already. You need to spend less than you make in order to have any savings to invest.
Caroline asks about pet insurance for her new kitten. My take? Insurance companies need people to collectively pay more insurance premiums than they pay out as benefits. That is how they stay profitable and make money. So the average person buying pet insurance is going to end up paying out more than they get back, or more than they would have paid out of pocket for pet-care costs.
Certain types of insurance are more important, like life insurance if you have dependants or disability insurance while you are working. In these cases, a death or disability could be catastrophic financially. Paying to extract a tooth for a pet is less likely to make or break you. I have several different types of insurance personally and for my business, but I do not have pet insurance for my dog, for what it is worth. Disability insurance for herself is probably the most important insurance Caroline can have right now.
Results She spent more. Spending in week one: $195. Spending in week two: $531.50.
How she thinks she did The second week is not the best representation for how much Caroline usually spends. The added cost of the visit to the vet and holidays gifts increased her total spending.
Take-aways Caroline said the advice about stocks was very helpful, but she was most surprised about the advice on pet insurance.
“Jason really put things into perspective. I was ready to sign up for pet insurance now I’m definitely going to rethink things,” Caroline said.
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