Investing foundations

Learn about important investing foundations and how it can help your investments.

  • Why paying yourself first is the ‘Golden rule’ of personal finance.
  • How to save time & increase how much you save with easy, automatic deposits.
  • Avoid temptation by setting up an automated investment plan.
couple sitting on a sofa

Finding it difficult to save for the future?

You may be finding it tough to think about your future financial plans - let alone retirement, when now seems so much more important. Let’s talk about the Golden Rule of personal finance: Paying yourself first. We’ll learn how this simple strategy can help get your goals back on track and get you on the way to a comfortable financial future.

In a recent Leger survey conducted by Questrade, over half of Canadians polled fear that they will not have enough money for retirement. But most Canadians say they have no plans to change their retirement strategy and investing plan, even with this fear of not retiring with enough, why is that?

Are you waiting to invest once something changes with your financial situation?

There’s always going to be a reason not to invest, and the longer you put things off, the harder it is to start and create healthy financial habits to achieve your dreams. But getting started doesn’t have to be a gigantic task. Starting an automatic investment plan is much easier than you might think, and helps establish the foundation for your goals. “Paying yourself first” can help take the guesswork out of when and how much to save, especially during uncertain economic, and personal times.

Whether it’s an emergency fund, a down-payment on a home, or simply saving for a nice vacation, paying yourself first can help unlock these opportunities.

So what does ‘Pay yourself first’ actually mean?

Paying yourself first means putting money in your investment accounts first (often by automated contributions, such as a pre-authorized deposit just like paying a bill), as soon as you get paid, and before you spend money on anything else. This can feel like the opposite of what you should do - shouldn’t you wait until the end of the month to see how much money you can invest?

If you only think about your investments after everything else in your life is paid for, it’s easy to end up with nothing left to invest at the end of the month.

To make it easy, you can think about your monthly expenses as 2 general categories:

Mandatory expenses: Bills that cannot be missed (i.e. Rent/mortgage, electricity, internet, food and medicine)
Discretionary expenses: Costs that can vary, and are not mandatory such as entertainment, new clothing, take-out, or streaming accounts. 

By paying yourself first, you’re putting your investments into the “mandatory” category, thereby removing the temptation to skip a contribution and spend the funds on discretionary expenses. By doing this, your investments become like any other bill that must be paid no matter what.

paying graphic

The order you pay your bills is very important for another reason. Cutting down on expenses (like take-out or TV streaming) to make room for a contribution is difficult to do. But if you pay yourself first, you can enjoy discretionary expenses like take-out or tv streaming without feeling guilty. It’s essentially “forced savings”. And if you automate making those savings, you save for your future without even thinking about it.

One thing that can hold people back is the fear that it’s ‘too late’ for them. The truth is it’s never too late, no one will ever say “saving was a mistake”. No matter how old you are, the best time to start is right now.

How to start - Automatic savings and deposits

The easiest way to start paying yourself first is by setting up an automatic, recurring deposit on payday. This allows you to “set it and forget it” while allowing your money to grow over time.

It’s very easy to set up an automatic contribution. You can choose to use our Pre-Authorized deposits (PADs), or recurring online bill payments, this takes the guesswork out of things.

You can set up a pre-authorized deposit from the “Funding” menu in your Questrade account, and link your chequing or savings accounts to make regular contributions in both Canadian and U.S. dollars. You can also set up a recurring bill payment right from your bank’s online banking page, however bill payments are limited to Canadian dollars only.

For more information about our automatic deposit/contribution options, please check out this helpful video on this topic, or our Funding your account article.

Automating your investments

So we’ve automated our savings and deposits, what's next? Automating your investments.

Setting up an automated investment plan allows you to put your money to work right away, rather than simply “parking” your cash and waiting for the right time to invest.

Automatic investing with Questwealth

One great way to automate your investments is through our Questwealth Portfolios™.

These portfolios are made up of a group of diversified Exchange Traded Funds (ETFs), and managed by a team of experts who monitor the markets, and adjust the portfolio as needed.

Getting started couldn’t be easier. You simply answer some questions about your investment goals and risk tolerance level and you’ll be invested in a portfolio that works for you. In one simple action, you’ll have a carefully planned, diversified portfolio that’s monitored and rebalanced. Yet another “set it and forget it” solution that can make your life easier.

Prefer to manage your investments yourself? No problem..

With a self-directed Questrade account, there are still a few options available to you to ‘automate’ your investments, and make things easier for you.

One of these fantastic solutions is through our partner Passiv.

Passiv allows you to link your Questrade accounts, and immediately invest the new cash deposits in your investment accounts. This way you can put your money to work from day 1, and lose no time ‘wasted’ with parked cash.

Learn more about Passiv on their site here, or check out our on-demand index investing webinar for more details.

Bringing it all together

Remember: it’s not necessarily about how much you start saving, but rather the act of starting itself.

We’re building good habits here that will evolve and improve over time. To use an old quote: “Rome wasn’t built in a day” - neither should your retirement plan.

Now that we’ve learned about why it’s so important to pay yourself first and put those funds to work right away with investing, it’s up to you to take the next step, and begin your journey towards financial freedom.

Remember to set up your automatic deposits to pay yourself first, and take advantage of both our managed and self-directed account options to allow your money to work for you from day one with automated investing.

Ready to start automating your investments? Get started with our Questwealth Portfolios, or explore the options available for your self-directed account through our partner Passiv.

Congratulations! You’ve just automated your savings and investments, and taken the first step towards a brighter financial future for you and your family.

If you enjoyed this post, please consider sharing it on Facebook or Twitter!

P.S. We’d love to meet you on Twitter or on Facebook

The information in this blog is for information purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.

 

Questwealth Portfolios is a service provided by Questrade Wealth Management Inc. Questrade Wealth Management Inc. is a registered Portfolio Manager, Investment Fund Manager, and Exempt Market Dealer. Questrade, Inc. provides administrative, trade execution, custodial, and reporting services for all Questwealth accounts.

  • What diversification means and why it’s important
  • The basics of diversifying by asset class and investment product
  • Some methods and tools to help you keep your investments diversified
Couple in the food store

Don’t put all your eggs in one basket. This popular saying is the core idea behind diversification: you don’t want to lose most of your eggs if your basket tips over. When it comes to an investment strategy, diversification might seem a little more complicated than that folksy wisdom, but the idea is the same.

How and why diversification works

In the investment world, diversification generally refers to purchasing a variety of securities, so that your portfolio doesn’t depend on the performance of just one.

The easiest way to show why diversification is important is to see it in action. Let’s look at a hypothetical example using a $1,000 portfolio:

Let’s say your portfolio is just a mountain of stocks in coffee companies, and nothing else. This is fine if the coffee industry is doing well, but if there’s a negative event that drops the price of coffee stocks by 25% (for example, if there was a public health report saying that coffee is bad for you), then the value of your entire portfolio would drop by 25%:

diversification-blog-graphic_portfolio_1

However, if your portfolio is more diversified, this fall in value could be reduced. Continuing the example, if you were to evenly split your $1,000 investment between coffee and tea, then the dip in coffee would only drop your portfolio by half as much (to $875, assuming the value of the tea stocks stay the same). Plus, if some coffee drinkers switch to tea, then your tea stocks may see gains (let’s say a 10% gain), which would mitigate the loss even more:

v2_diversification-blog-graphic_portfolio_2

Of course, in this scenario, you’re still invested entirely in caffeinated beverages. If that report said that caffeine was bad for you and people stopped drinking both, that would still have a negative impact on your entire portfolio. To prevent this, we might diversify further, into industries that aren’t so closely related.

So let’s diversify our hypothetical portfolio even further, investing only 20% of our stocks ($200) in caffeinated beverages, and spread the remaining evenly between, say, banks, mining companies, utilities, and technology companies, investing $200 in each. Applying the 7.5% overall dip on caffeine from the above example, the result may look like this:

v2_diversification-blog-graphic_portfolio_3

In this example, the significant caffeine dip is completely mitigated by the overall gains in other sectors.

In other words, the more you diversify, the less reliant you are on a single company or industry.

Diversification can also be beneficial when stocks are rising.

Large rises of a sector, or of the market as a whole, can often be led by a few large-earners. Since nobody can be certain which stocks or industries are going to lead the next surge, a well-diversified portfolio can greatly increase the likelihood that you will get a share of the gains.

Diversification can also help you to capitalize on stocks that are temporarily down through rebalancing, defined below.

Diversification methods and tools

Exactly how you diversify your portfolio will vary depending on your own research, your level of acceptable risk, your investment timeline, and your overall investment strategy. However you decide to diversify, there are methods and tools to help you keep your portfolio on track with your diversification strategy.

  • Rebalance regularly. When an investment sees a gain or loss (particularly if the investment is volatile), its percentage of your overall portfolio will rise and fall. In that last chart, the “Caffeine” and “Utilities” investments dropped while the others rose. When the dust settled, only about 18.5% of your portfolio was Caffeine, instead of the starting 20%. Rebalancing would readjust the portfolio so that “Caffeine” and “Utilities” would once again each represent 20% of your balance, so that any recovery has the proper impact in your overall portfolio.

    If you’re looking for help with rebalancing your portfolio, we offer a free tool called Passiv that is designed to help you maintain that ratio, sending you alerts when your portfolio gets too far out-of-balance.

  • Consider pre-diversified products. Many ETFs are designed to be diversified to certain specifications, and are regularly rebalanced by their issuing company. The exact composition of ETFs can vary—some are collections of stocks within a specific industry, others are a collection of various asset classes. Just make sure that you are aware of how well the contents of your ETFs fit in with your diversification strategy.
  • Get a Questwealth Portfolio. Questwealth Portfolios are investment portfolios that are diversified for you and dynamically rebalanced. Answer a few questions about your financial situation, time horizon and risk tolerance and you’ll receive a portfolio designed to get you to your financial goals.

There’s no universal solution when it comes to diversification. But by understanding how diversification works and why it’s important, you’ll be better equipped to make informed investing decisions that suit your goals and strategy.

If you enjoyed this post, please consider sharing it on Facebook or Twitter!

P.S. We’d love to meet you on Twitter or on Facebook

The information in this blog is for information purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.

  • What is compound interest?
  • Why compounding is so important to successful investing
  • How high fees can reduce the gains from compound interest
The lake

You may have heard of “the magic of compound interest.” Although it’s not magic, compound interest does have an impressive ability to help you build wealth. But if you’re not careful, its wealth-building power can easily be reduced by high fees.

 

You may be finding it tough to think about your future financial plans - let alone retirement, when now seems so much more important. Let’s talk about the Golden Rule of personal finance: Paying yourself first. We’ll learn how this simple strategy can help get your goals back on track and get you on the way to a comfortable financial future. 

 

Now, we live in a world where the more we pay for a product or service, the more we typically get. But when it comes to investments, the opposite often holds true: the more you pay in fees, the less money you get to keep. So, let’s take a closer look at how compound interest works, the role of fees in successful investing, and how high fees can chip away at the gains you make from compound interest.

What is compound interest, exactly?

Einstein (yes, that Einstein) is said to have called compound interest the “eighth wonder of the world". Pretty high praise from a man considered one of the world’s greatest thinkers. He reportedly went on to say, “he who understands it, earns it; he who doesn’t, pays it.” Whether or not these words are from Einstein himself, they hold much wisdom. So, let’s get down to understanding compound interest.

Interest comes in two flavours: simple and compound. If simple interest is a good thing, compound interest is even better because it helps you grow your money even faster. With simple interest, the amount you receive is calculated as a percentage of your original deposit. With compound interest, it’s calculated as a percentage of your original deposit plus all accumulated interest. So the interest earns interest. Then the interest on the interest also earns interest, and so on. It’s one big bundle of earnings.

Compounding adds dramatically to your earnings

This difference between simple and compound interest is huge. Check out this table that compares the two:

Initial deposit $10,000   $10,000
Balance after 1 year $10,500   $10,500
Balance after 2 year $11,000   $11,025
Balance after 3 year $11,500    $11,576.25
Total interest earned $1,500   $1,576.25

In just three years, the compounded interest puts an extra $76.25 in your account, without having to do anything.

That may not seem like a big deal, but take a look at what happens over a longer time frame:
 

Initial deposit $10,000   $10,000
Balance after 10 years  $15,000   $16,288.95
Balance after 20 years $20,000   $26,532.98
Total interest earned $10,000   $16,532

What amounts to less than a hundred dollars’ difference after three years grows dramatically over two decades. Simply by allowing the interest to compound, you would've earned an additional $6,532.98. Not too shabby. (Wondering how long it takes to double any investment with compounded returns? Read our blog on the rule of 72 .

The key to successful investing

If compound interest is like growth hormones for your money, paying high fees is like putting your money on a starvation diet. When management fees are deducted from your account, they act like kryptonite and sap the superpowers of compounding returns.

Successful investors know that you need to do everything you can to maximize returns. But if you’re paying high management fees, it’s like trying to catch rainwater in a bucket with a hole in it. It doesn’t matter where you stand or how hard it rains, the water leaks out of the bottom.

Imagine this: say you were earning 5% like in our table above, but had to hypothetically pay management fees of 2.25%. Now your 5% return is really only 2.75% — and you have just over half the earnings to compound.

What are you paying for?

Some people resign themselves to the fact that management fees “are what they are,” as the saying goes. But there are alternatives.

One easy option is to invest in Questwealth Portfolios. These portfolios are designed by our portfolio managers and hold a globally diversified selection of ETFs. They are actively managed by experts who watch the markets and make adjustments when necessary to keep each portfolio balanced and aligned with its goals. Because the portfolios hold ETFs, you’ll enjoy ultra-low fees so more of your money benefits from compounded earnings over time.

So, when you’re evaluating investments, think of that compound interest quote. Don’t be the person who doesn’t understand compounding and ends up paying. Instead, be the one who does understand compounding and earns compounding returns.

If you enjoyed this post, please consider sharing it on Facebook or Twitter!

P.S. We’d love to meet you on Twitter or on Facebook

1Past performance is not necessarily indicative of future returns.

The information in this blog is for information purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.

Related Lessons

Want to dive deeper?

Read next

Explore

Have more questions?

Tell us what you need help with, and we’ll get you in touch with the right specialist.

Your feedback is important for us. Share your feedback