Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
So you got your hands on $Zk. Cool! Saving any amount of money isn’t easy and a big sum like $45,000 is a huge accomplishment. Now it's time to figure out what to do with that big old pile of dough. If you have credit card bills, pay them first, and it’s also a very good idea to have three to six months of living expenses banked in case of an emergency. If you’ve got those things taken care of, then you're cleared to start investing, here's how.
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Factors that dictate how to invest $45,000
First, you’ll want to assess five factors that will dictate your next move before investing your $45k.
The first step is determining what you intend to do with this $45,000. Is this $45,000 the money you hope to be your first big push towards keeping the lights on, the cat fed, and the fridge stocked during your retirement in thirty years? Or is this the miracle inheritance from Aunt Beatrice that you’re going to use to put towards a down payment on a bigger apartment so you no longer have to live in a place where the bathtub’s in the kitchen?
2. Time horizon:
This refers to how long you plan to hold a particular investment. In general, if you have a short time horizon, you’ll want to pursue a less aggressive investing strategy. An investor who needs the full $45,000 investment to be available in three weeks, three months or even three years will probably want to avoid a strategy that invests heavily in equities (aka stocks). Generally, stocks fluctuate in value much more than other investments such as government-backed bonds. If you need your money in the short term, the last thing you want is to do is have to withdraw it all when the market is down. How long you can afford to invest for matters a lot when it comes to choosing where to invest your $45,000. If your investment is for retirement, your time horizon will be affected by your age and the years between now and when you plan to retire. The more time between now and your retirement the longer the time horizon is.
How old are you? How's your health? How much do you earn? How much do you save? Any chance you'll soon be getting married or divorced? This one covers all the subjects your mother taught you are impolite to talk about at dinner parties. Circumstances would cover how much money you have now—and how much money you anticipate you’ll be getting in the future, via factors like inheritance. Money can be liberating — if you have a cushion to depend on and you don't need the money for a long period of time then investing might be a good option for you.
4. Risk tolerance:
All of the above factors will dictate your risk tolerance, a term that simply means how much of your investment you can afford to lose. If your $45,000 was abducted by aliens and your life wouldn’t be materially affected in any way, you have an incredibly high-risk tolerance. If without your $45,000 you won’t be able to come up with next month’s mortgage payment, your risk tolerance is extremely low. In a situation like the latter, you’d probably want to put the entirety of your $45,000 somewhere there is less risk, perhaps a cash equivalent that throws off some interest. A savings account or a high interest savings investment account might be a good fit.
5. Your emotions:
Believe it or not, your ability to handle emotions play a big part in dictating where you should invest. The last thing you want to do is start trading on your own and end up panic selling or buying when the market dips a little. Any investment that is at all volatile will require some willpower in sticking to your investment strategy through choppy seas.
If you're scratching your head wondering how all this applies to your investing strategy — it might be a good time to take a risk survey offered by many automated investing services. They'll then build a personalized portfolio for you based on these factors and others.
The best accounts for investing $Zk
Don't underestimate the power of choosing the right investment account to store your $45,000. Taxes are like investment termites — they'll chew clear through your investment if you let them. Ideally, you should do anything you legally can to lower your tax bill. The government has actually created tax breaks to incentivize citizens to save for retirement and other big life expenses. An incredible amount can be saved by investing the maximum possible into what are known as “tax-advantaged” accounts. These investment vehicles either allow investments to grow within them tax-free or only become taxable when you withdraw money years down the line in retirement. Provided the time horizon on these accounts fits with your goals, grab as much of the “free money” as you can by maxing these accounts out first.
Think of tax-advantaged accounts as the top cups in those cool champagne towers; only after the top cups get filled should your money trickle down into other types of accounts. Then, it will be a good idea to open a personal investing account where you can keep all your other investments.
Open an RRSP and/or open a TFSA, both of which offer tax benefits that you should avail yourself of before investing in non-tax advantaged accounts. Which one? Well, it really depends.
TFSA: TFSAs are great for two types of investors: those who don't earn huge salaries and/or those who plan to do something with the investment before retiring, because unlike RRSPs, you won't pay tax if you take the money out pre-retirement.
RRSP: RRSPs are a better idea for people who are making more now than they anticipate they’ll make in retirement since they’ll be taxed at a lower rate when they withdraw the funds down the line than they would now. Though RRSPs have a reputation as being impossible to crack open pre-retirement without huge tax penalties, there are ways to spend the money and not get killed by the CRA. If you want to finance a down payment on a house or fund yours or your spouse’s education you can take an interest-free loan from your RRSP provided you pay it back before the plan collapses.
RESP: If you want some of your $45,000 to be used to fund your kid's university education, you should consider opening a RESP. RESPs are great for three reasons. First, the money grows within them tax-free. Also, it isn’t considered taxable income when it's withdrawn and spent on educational expenses. And best of all, thanks to a program called the Canadian Education Savings Grant (CESG), the government will match 20% of your contributions, up to a lifetime limit of more than $7,000 per child. Yup, the government is willing to give your kid the cash equivalent of a reliable, 10-year-old used car.
Personal Investment Account: If none of the tax-advantaged accounts suite your needs you can always open a personal investment account. This is an account that allows you to buy and sell securities, stocks and bonds, it just doesn't come with the nice tax advantages of the other accounts.
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Where to invest $45,000
At last, we’re ready to actually invest that $Zk of yours. There are infinite ways to invest your money — alpacas, anyone? It’s necessary to warn you that investments are speculative and past results should never be understood as predictors of future performance. That said, here are the smartest destinations for your $45,000.
The Stock Market
Here is a totally uncontroversial opinion. If history is anything to go by, one of the quickest potential ways to have made your $45,000 to grow would have been by opening a trading account and investing in the stock market. But what stocks should you have bought? Chances are you’ve heard stories about some dude who invested a thousand bucks in Amazon in 1997 who now lives in a castle. What you don’t hear about as much, however, are the stories about some other guy who went all in on Snapchat and now lives in his mom's basement. Stock picking is extraordinarily hard. Famously rich stock picker Warren Buffett has spent the last decades discouraging pretty much everyone not named Warren Buffet from trying to make money picking individual stocks and in fact, has encouraged his heirs to invest the lion’s share of their inheritance in low-fee, highly diversified stock funds.
Bonds are another option for your nest egg. Bonds are almost like a loan agreement — essentially, one party gives another party money with the understanding it will be paid back in the future with interest. There are many types of bonds from government bonds, which provide nations the cash they need to pay their bills, to municipal bonds, which provide the funds to complete local city projects like bridges and parks. Bonds are typically seen as a less risky investment when compared to something like stocks. As a result, many investors have some of their investments in bonds. Investing some of your money in bonds could be seen to counteract the volatility of the stock market. While getting into the nitty-gritty of bonds is not for the faint-hearted, investing in them is a little easier. Bonds can be bought directly from the government, via discount brokerages, or online as part of an investment portfolio offered by investment platforms.
Watch enough cable TV, and you’ll assume that anyone with a tape measure and a barrel of hair gel can make millions flipping real estate. In reality, it's a business with huge risks that have been known to ruin unwise speculators. Home ownership has been for generations a kind of forced saving plan for undisciplined investors. Without that monthly mortgage payment, many might not have saved anything at all. There is one way to benefit from the real estate market without having to use most or all of your $45,000 buy to an apartment or house; real estate investment trusts, or REITs, are companies that sell shares in their various real estate investments. Real estate may be a part of some investment portfolios created by robo-advisors.
Exchange traded funds (ETFs) are a catch-all term to describe baskets of equities that can be traded on a stock exchange, so telling someone your longterm financial strategy is to invest in ETFs is a little like answering “food” when you're asked to describe your diet. The great thing about ETFs is that since many of them invest your money in hundreds of equities, you’ll minimize risk by avoiding putting all your eggs in one basket. Some ETFs contain stocks, others bonds, and some feature real estate investments. You can purchase ETFs by opening an account with an investment provider and making trades. ETFs that seek to mimic much, or all of the stock market are particularly valuable parts of a balanced portfolio, since if one sector is not performing well, it won't drag down your entire investment. There are many ETFs to choose from. Index ETFs mimic an index like the S&P 500, so for one price you can buy slivers of the 500 most valuable publicly traded companies in America. But one ETF does not a diversified portfolio make; you'll need several different ETFs order to achieve the kind of diversification that most financial advisors recommend. Online investing platforms are particularly valuable in figuring out which ETFs to buy, and how to divide your portfolio among them.
If the sound of buying stock, ETFs or any other type of investment sounds confusing, let alone trying to choose them yourself, automated investing might be a solid option to consider. Online investment platforms, often called robo-advisors allow you to take a risk survey and build a portfolio to suit your investing goals. Rather than sweating the details, you can have a special portfolio built according to your risk tolerance and goals and get back to the truly important stuff in your life, like those dragons in Westeros.
Best way to invest $45,000
Investments are nothing like that Slanket your mom bought you; one size will absolutely not fit all (and you probably won’t try to re-gift your investments.) So without knowing your specific situation, it’s hard to tell you precisely where to put your $45,000 dollars. That being said, there are some best practices we recommend for all investments.
Keep fees low
Just like taxes, fees are like investment termites too; left unchecked, they’ll devour everything you value. If you can become a cold-hearted fee exterminator, you won’t believe how much money you’ll be able to save over the long term. It’s not uncommon for an actively managed mutual fund to carry a 1% management expense ratio (MER). This means that every year, regardless of how well the fund performs, 1% of the entire fund will be deducted to pay salaries and expenses of everyone who works on the fund. One or two percent might not sound like a huge sum, but one investment advisor showed that a fee of just 2% could decrease investment gains by half over the course of 25 years. Fiddle with a fee calculator to see how trading a 2% MER for a .5% one could affect a hypothetical $45,000 investment.
Invest in a passive portfolio
Hold on, you might be thinking. If mutual fund managers are super good at picking the best-performing stocks, the fees they charge shouldn’t be a problem. The funds will be throwing off returns that far exceed those of the stock market as a whole. The problem is they’re not. Most studies show that professionals paid to pick stocks will fail to outperform the overall market over the long term. So if active pickers can’t beat the stock market and still charge fees, what's a better route? For most goals, time horizons, and risk tolerances a particularly effective way is through passive investing. This can be done by using robo-advisor. Rather than attempting to beat the market, most robo-advisors attempt to mirror the market by investing your money in many different ETFs. That's a job easily handled by a computer algorithm. Low fee passive portfolios of ETFs can be designed with any goal, time horizon, and risk tolerance in mind.
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How to invest $45,000 safely
If safety is what you're looking for then you will need to look for low-risk investments, though you should know that there are no guarantees in investing. Stocks, being naturally risky, will fluctuate in value. In exchange for taking on this risk, investors will generally be rewarded with higher returns than they'd get from less risky investments. If you absolutely can’t risk any fluctuation, you’ll be better served with a savings account or a savings product, that typically carry virtually little to no risk. That said, you can't expect the kind of returns you might get from investing in ETFs made up of stocks, bonds, and real estate. In fact, interest rates have lately been so low that inflation is likely to outpace the interest rate, and in the long run, you’ll essentially be losing money by keeping your money stuck in one. Government bonds come with less risk, but also provide comparatively low returns.
The conventional wisdom is the longer your investment horizon, the higher the ratio of stocks to bonds your portfolio can contain. If you don’t need to withdraw money in the short term, you can afford to ride the wave of the stock market. See, stocks behave a little like a penny tossed in the air; the more times you do it, the more likely it is you'll get to a one-to-one heads-to-tails ratio, and the longer you hold a stock, the more predictable the results will be. The range of outcomes tend to narrow over time, so in the past, those who held onto a variety of stock investments for more than a decade were most likely rewarded with returns that offset any short-term risk.
How much can you make by investing $45,000 – if only we knew!
Without the use of the dark arts, how do you turn $45,000 into a whole lot more? There's no sure answer to this question. If there was — we'd all be rich. With investing, you can make money, but you can also lose it. That said, if we dust off the history books, we can see how this could have happened in the past. Between the years of 1950-2009, the stock market (S&P 500) grew on average by 7% per year. So, had you invested $45,000 during that time, the miracle of compounding could have turned your $45,000 into about $128,203 in 15 years.
This is based on historical market growth. When it comes to investment advice, there's a very good reason you often hear “past performance, does not equal future results”. It's because past performance absolutely does not equal future results. That being said, if you're disciplined, your risk is minimized through a highly diversified portfolio, and fees kept low, you might be very happy with what your $45,000 grows into in the long term.
Although we're biased, we reckon the absolute best way to invest $45,000 is with Wealthsimple. We offer state of the art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from an automated investing service. Get started or learn more about our portfolios.
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