When comparing the rate of return on investments, it is helpful to have a consistent standard. By far the most common standard is to simply compare the annualized rate of return. If investment A return 3% and investment B returns 5%, the risk of the two choices being equal, the obvious choice is investment B.
That is good as far as it goes, but what does it really mean in terms of long-term growth? In other words, how meaningful is that 2% difference?
The Rule of 72 allows you to measure investment returns in term of time instead of percentage points. If you use doubling time (how long will it take for money to double) as a standard of measure, you can see how long your investments will take to bear fruit.
Continue reading The Rule of 72
A wonderful new opportunity…that many people waste
Tax Free Savings Accounts (TFSA) were introduced in the 2008 budget, and went into effect in 2009, so they have been around for a few years now. According to a CIBC poll, almost half of Canadians have opened a TFSA, but there is still a lot of confusion about just what a TFSA is, and how to use it.
The problem may start as early as the third and fourth words of the name of this savings and investment vehicle. People are of course attracted to anything that has the words “Tax Free” in it, but in this case they seem to focus on the “Savings Account” part of the name. According to ING, almost half of Canadians have their money invested (using the term rather loosely) in a savings account. While I’m not going to disparage anyone for saving money, I will point out that that is generally not the best way to use a TFSA; putting money into a savings account within a TFSA is squandering an opportunity to make the most of this vehicle.
Continue reading TFSA: Concentrate on the TF, not the SA
A bouncing baby TFSA
Introduced in February of 2008, Tax Free Savings Accounts (TFSA) represented the biggest change to Canadians’ personal finances in many years. Here, suddenly, was a vehicle that seems to be (and in my opinion really is) an investor’s dream: a way to invest money, and never be taxed on it; a vehicle that allows people to withdraw money at will, and then replace it again in future years (again, without tax consequences); a vehicle that is open to everybody over the age of 18, regardless of income; a vehicle whose contributions room increases every year, even when a person reports no earned income. These are all great feature of the TFSA, but their biggest advantage may be the low annual contribution limit. The low limit allows people to max out their contribution, and feel like they have control over this part of their lives. The idea that you’ve done all that you can do, that you’ve won the game you are playing, is highly motivating; it makes people want to play again and again.
Continue reading Play a Game You Can Win: TFSA’s