If you want to get rich – or at least live comfortably – you need to make your money work for you. While stuffing your hard-earned cash under your mattress will save you from paying taxes, it will also ensure that your wealth never grows.
The easiest and best way to grow your money is to always pay yourself first – save a minimum of 10% of your income to start and more as your salary increases. This is particularly important for young investors, to get them into the habit of saving their money and enjoying the benefit of compound interest. Investors should also be putting their money in short- (Tax-Free Savings Account, TFSA) and long-term savings (Register Retirement Savings Plan, RRSP) and remembering to diversify.
Here are five income streams that can help grow your money.
1. Capital Gains
Capital gains is the result of selling something for more than you paid for it. This covers a lot of investment purchases and could include a property outside of your main residence, stocks, or mutual funds. The opposite of capital gains – if you sell a property for less than you purchased it, for example – is called a capital loss.
Dividends are what you receive from a purchased stock or mutual fund. When you buy shares in a company, you’re buying ownership into that organization, and as an owner, you get a share of the company’s profits. At the end of each quarter, companies will tell their investors – people who own stock, such as yourself – the share value.
As with mutual funds, which you can also receive dividends for, there are stocks that are less risky, in that the dividend price is fairly stable. With riskier stocks, such as precious metals, dividend prices tend to fluctuate more.
Investors who receive quarterly money from their dividends can either cash it out or reinvest it, although financial planners suggest it’s always a good idea to reinvest “free” money.
There are multiple stock options, and the amount of risk varies with each product. You should diversify not only within different sectors, but also within industries and companies themselves. For example, you shouldn’t be putting all your money in one cannabis stock, but rather investing in a variety of different companies. Most institutions require you to invest a minimum of $500 in a mutual fund, and you can purchase a fraction or half of one. Stocks, on the other hand, must be purchased in full.
3. Rental Income
Some make money buying and selling homes, while others go the renting route, purchasing a home and finding tenants to rent it to. The goal of rental properties is to see an increase in real estate prices, and to earn money from the occupants. Those looking for a location to purchase can turn to a city’s municipal website, which typically features statistics on rental occupancy.
According to most experts, people who decide to make money from rental properties should treat it like any other business, ensuring they hire an accountant and set aside money for emergencies. Landlords should also ensure that they take the time to find tenants who will treat their investment with respect and care, because many laws benefit tenants, rather than the landlord.
Also worth noting is that rental income is taxed in full, and if you sell your rental property, you’ll be taxed on the capital gains.
4. Investment Income
While guaranteed investment certificates, or GICs, are a safe way to invest money – your original investment is 100 per cent guaranteed – financial planners say they’re not an ideal place to put your money, particularly if you’re investing in the long term. This is partly because the interest on GICs is usually lower than the cost of inflation, so they don’t really grow your money. They’re also taxed more than any other non-registered accounts. GICs, however, are good for risk-averse investors because of their security. Depending on the institution, you need a minimum of $500 to invest in a GIC.
Have a book waiting to get out on paper? A product you think will change the world? Do it well – like Microsoft founder Bill Gates or Amazon’s Jeff Bezos – and you’ll be set for life. But royalties can also be earned when you invest in someone else’s business. If a business owner wants to create a product, but lacks the money to do so, they seek investors to help. An investor would then receive a certain amount per item produced until they get their money back, and then be entitled to a certain amount of money for a term set out in the contract.
Life and Taxes
So, you’ve made your money, but is it taxable? For the most part, the answer is yes; any money outside of an RRSP or TFSA is taxable. Tax planning, which includes estate planning and insurance, should be part of every investor’s growth plan and is just as important as financial planning. It can save you – and make you – money. People who want to increase their wealth should always pay themselves first, hire a financial planner, and invest their money smartly. Happy investing.
Lisa Day | Contributing Writer