If you have built up some extra income, it is not recommended that you leave it sitting in a regular savings account. Instead, it should be invested where it can collect interest and you have the opportunity to receive returns on it. Below are 5 popular types of investments you can make and how they can help you financially.
1. Guaranteed investment certificate (GIC)
GICs are investments made where you agree to give an up-front amount and it is held for a specified term. At the end of the term you are guaranteed the initial amount plus any interest earned. You do have the opportunity to cash out early but obviously the interest you receive will not be as much.
Because GICs offer a guaranteed return, the interest rates on them compared to other investments are low. Nonetheless, they are still guaranteed to give you your original investment plus interest so you will see some gains. To maximize your return as much as possible, it is recommended that you wait to cash out until the end of the term. Afterwards, you can re-invest your return at the end with some of the best GIC rates, or ladder your GICs which means staggering them at different terms and reinvesting them at term expiry.
When you buy stocks, you are buying a share of a company and as a result receive share of profits. Many factors can influence the value of a stock, including supply and demand, interest rates, and the health of the economy.
Purchasing stocks can help you financially. While they do rise and fall in value daily, usually stocks on the market ultimately rise in value. Stocks offer the highest rate of return when all types of investments are compared, allowing an opportunity to build wealth. You can easily diversify your stock portfolio, meaning investments in many different industries in different countries. This allows you to maximize your opportunity for growth and people are usually satisfied with the results.
3. Tax-free savings account (TFSA)
A TFSA is an account where you can make contributions to it and deposits and interest earned is not taxable. Any withdrawals made are not taxed either but there may be annual limits to what you can contribute.
TFSAs are beneficial because you will not be required to pay income tax on it which may hurt you financially. You can use your TFSA to save up for larger purchases, making tax-free withdrawals when you have enough. This helps you financially because you will be able to avoid taking out a loan or line of credit to finance the item. TFSAs can also act an emergency fund, providing you with the money you need when you need it without putting yourself into more debt.
4. Registered retirement savings plan (RRSP)
RRSPs are similar to TFSAs where deposits are made into an account sheltered from taxes. However, withdrawals made will be added to your yearly income and therefore will be taxed.
RRSPs will help you financially because it includes funds earmarked for when you are retired. This is key because retirement is typically characterized by lower income. Having the funds you saved in RRSPs gives you what you need to be comfortable without turning to borrowing options. Because RRSPs are considered a long-term investment you are able to take some risk without seeing immediate effects which can lead to greater gains.
5. Mutual fund
A mutual fund refers to an investment that entails a larger pool of money from various investors. Finances collected are then invested in products such as stocks and bonds.
Mutual funds will lead to great wealth for you because you are able to diversify your investments without large amounts of cash usually needed for other types of investments. Mutual funds are usually controlled by a manager who has carefully researched what products to invest your money in. Therefore, you will only be investing in ones that offer the greatest possibilities of returns.