TFSA or RRSP - The Decision Tree for INVESTING in Canada 💰

a lot of people actually reach out to me asking whether to invest in tfsa rrsp what's best for them so in today's video we'll be investing first when not to invest your money in the stock market then we'll talk about how much to invest then we talk about where to invest whether it's tfsa or rlsp or something else and how to decide and in the end we'll also be discussing about my investment strategy and how I invest in the stock market so let's get started [Music] before I begin the video I'll highly recommend that you subscribe to the channel this channel will actually bring you a lot of information on investing starting a business side hustles there's a lot in store for 2023 and Beyond so do subscribe to the channel it will really help support and grow this channel so let's first talk about when not to invest in the stock market because there are certain reasons why you would not want to do that so the number one reason you should not be investing is if you have high interest rate of over seven percent interest rate you need to pay that first because I don't know what's going to happen in the stock market sometimes it's up sometimes it's down but if you pay down your debt which is more than seven percent that's a seven percent return on your money guaranteed and therefore you should first concentrate on paying down this kind of debt the second one is if you do not have an emergency fund of minimum three months at least three months I always recommend doing four to six months if you are someone who is risk-averse like me but you should have minimum of three months of expenses saved into a high interest savings account that you do not invest ever that's just a safety net that you have in case you lose your job or something is to happen and until we have this emergency fund ready we should not think about investing into the stock market the third reason to not invest is if you are saving for a house within one year the reason why I'm saying this is if you put the money into cfsa and rrsp now RSP is different I'll talk about that in a bit but if you put your money into stock market in general it can go down when you are due for buying a house and you don't want to make a loss on that money and therefore if you're buying a house in the next one year I would not recommend investing that money into the stock market now if you have additional money over and above what you have earmarked for the house buying then it's okay to invest but if that's the only money that you have first save up for the house buy the house and then move on to investing into the stock market and the fourth reason to not invest is and this is something which is different if you are starting a business or building your business just like me it's okay not to invest in the stock market till the time you are comfortable with the cash flow that you're getting from the business every single month now before we get into the question of tfsa and rrsp let's talk about how much to invest in the stock market and my thumb rule is to invest 20 of our net household income that's what we have been doing for the longest time but it should be minimum of 10 if you think that 20 is too much start with 10 and bend yourself to 20 that would be my recommendation now one mistake that I used to do when I was starting my investing Journey was that I did not pay myself first what I mean by that is when I get the salary I used to pay rent I used to pay all the expenses that I had I used to even shop with the money that you know that was coming in from the salary and then whatever was left over I was investing instead of doing that we need to pay ourselves first which means that before our expenses twenty percent of our income has to be earmarked towards investment and what's left after that should be budgeted into different expenses now that we know how much to invest now let's talk about where to invest whether it's rrsp or tfsa so let's talk about rrsp first it's called registered retirement savings plan I don't know why it's called savings uh but yeah it's in assessment account it's not just a savings account it's not something that you just put your money like a GIC or you know a fixed deposit that you have in India um you know it's it's it's actually an account where you invest your money but it has certain advantages and let me just explain those advantages let's assume that our gross income is fifty thousand dollars and our after tax net income will be about 39 000 so it will be a roughly 25 tax bracket that we are in and our net income if you don't invest into rrsp or anything else will be 39 417 the rrsp contribution that you get is 18 of the last year's income and that's something that we need to understand as new immigrants if if you have not filed your taxes even once in Canada you would not have the option of contributing towards rrsp so just make sure that you talk to an accountant before investing into rrsp and you know exactly how much your room is but if you filed your taxes this is the room that you will have 18 of last year's income whatever you have filed in your taxes so let's assume that you have put the entire nine thousand dollars whatever is your contribution room and now the taxable income is not fifty thousand dollars but fifty thousand minus nine thousand dollars and therefore your after tax income will be forty one thousand nine hundred and seventy two which is two thousand five hundred dollars more than what it was if you had not contributed towards rrsp and therefore at the end of the year because you have contributed to your rrsp nine thousand dollars you will get a tax return of 2500 so the way RSP works is it helps you save tax on your active income any given year if you contribute a certain amount towards rrsp now RSP is like any other investing account you can invest in stocks ETFs index funds really talk about you know where to invest with platforms so you'd you know by the end of this video you can get dividends you can get appreciation and the biggest thing that rlsp also allows you to do is employ a contribution a lot of companies actually contribute the same amount of money that you are contributing into rlsp and they match it 100 that's 100 free money that you're getting from your company into your rrsp account and that's a great thing and you get tax when you take the money out so you are contributing to a rrsp let's assume that you contributed nine thousand dollars or six thousand dollars whatever that amount is for 30 years you are getting a tax return every single year that you invest into your rlsp and then you will be taxed on the entire amount when you take the money out at a retirement so you're not getting taxed and you're in fact getting a tax return at this point in time but that doesn't mean that you do not pay any tax on your money that's kept in the rrsp account you just pay it at a later date and that's why it's called differing tax so the advantage of rrsp is that you have the employer contribution that's an amazing thing you that's 100 free money that the employer is putting into your retirement savings the second Advantage is that you're getting a tax return during the active years of work and that's important because right now the tax bracket that you have is much higher and therefore if you are able to contribute into rrsp and reduce your tax liability now in most cases at retirement the income will be a lot lower and therefore the tax bracket will be alone so if you take the RSP money out during retirement you will be taxed a lot lower than what you would be if you don't contribute right now and the fourth and one of the biggest advantages for first time home buyers is that you can use up to thirty five thousand dollars of that RSV money towards your first house now that doesn't mean that you'll never be taxed on it it just means that you can take the money out tax-free thirty five thousand dollars per person if you're two people you can actually take out seventy thousand dollars but you have to return the money back into the rrsp account within 15 years if you don't do that then you will be taxed on that thirty five thousand dollars or whatever the money you take out from your rlsp for your first purchase now let's talk about what tfsa is TFS is called tax free savings account I don't know why again it's called a savings account because it's basically an investing account let's assume your gross income is fifty thousand dollars your after tax income is 39 417 it's the same as what we did earlier you contribute up to sixty five hundred dollars that's the contribution limit for 2023 from your tax paid income so unlike rrsp where you were actually getting a tax advantage so if you are earning fifty thousand dollars and if you're contributing let's say six thousand dollars your tax now at forty four thousand dollars whereas here you are taxed at fifty thousand dollars and you are then investing the tax paid money into your tfsa account and there's a limit to how much you can do per year so tax return here is zero dollars and I know that you are thinking that then what's the advantage of this and rrsp is way better just hold on and I'll explain you in a bit but just like rrsp you can invest in stocks ETFs and interest funds through and through a tfsa account you can get dividends and appreciation but the biggest Advantage is that at retirement let's say you put six thousand dollars every single year into the tfsa account and at a retirement you want to take the money out that money will be tax-free at retirement so if you have a million dollars in your tfsa account at retirement at 65 and you take all million dollars out you will not be taxed a single Dollar on that and that's the advantage and that's why it's called a tax sheltered account so that you might have is what's better and it depends it depends on two scenarios let's take scenario number one where there's no employer matching in rrsp like I said before there are certain employers who will match your contribution into your rrsp let's assume a case where there's no employer matching and then we are comparing rrsp versus tfsa so in this particular scenario let's assume that your RSP contribution is 500 a month for Simplicity I'm just taking 500 a month which is 6 000 a year your tax return will be 1800 per year so that's the amount of money that you save in taxes if you contribute 500 a month towards rlsp you invest that 1800 into your tfsa now you have to do something with the money that you are getting now you can buy expensive things you can buy you know fancy clothes but I would recommend that the money that you get as tax return should be invested into tfsa let's assume that you do that for the next 30 Years investing into rrsp and then investing whatever tax return you get because of investing into RSV into tfsa if you do it for 30 years your rrsp contribution will be one hundred and eighty thousand dollars which is 500 per month for 30 years and that will be worth at 8 percent year-on-year return because it has compounded year on year will be 734 000 in your rrsp account and because you were contributing the tax return which is eighteen hundred dollars into tfsa that would be worth another 220 000 so overall we'll have almost a million dollars in our retirement fund after 30 years but we also need to pay tax on rrsp now this is a very complicated calculation you would obviously not take out all the money together you'll be taking out every single year some part of the money usually people say that you should take out four percent of your retirement funds every single year but let's assume that your tax packet that time is 25 and for Simplicity I'm just saying that you know over time you'll be paying almost 25 percent uh tax on your rrsp uh savings that you have so after deducting 25 tax on the 734 000 your RSP con you know rrsp that is usable to you is 550 000 your tfsa because it's tax free savings account will be the entire 220 so there's no tax on that's the overall the cash that you have for your retirement that is usable is 770 000 now let's take the same calculation into tfsa where your tfsa contribution is 500 a month which is six thousand dollars a year same as rrsp the tax return obviously is zero dollars because this is not our recipes this is tfsc and there's no tax return that you get because you actually invest into tfsa on tax paid money you repeat this for 30 years your RSP contribution will obviously be zero but your pfsa contribution will have grown to 734 000 which is the same that you would have had on rrsp however because there is no tax so overall usable funds that you have on retirement are the same 734 000 so honestly there's not much of a difference between the two strategies but if you had not invested the tax return that you got into tfsa you would be much worse off so if you are planning not to invest the eighteen hundred dollars that you are getting as tax return into tfsa I would not recommend this rrsp strategy with you I always recommend to do tfsa first now let's talk about scenario 2 where the employer is actually matching in rrsp it will be the exact same calculation all over the only difference here is that putting 500 the employer is also contributing 500 into the rrsp account and therefore you now have one thousand dollars a month going into that twelve thousand dollars a year and overall your contribution is double now your returns are double now and overall you will be at 1.32 million dollars and even if you only were only doing rrsp and not contributing towards a tfsa the get you know and tax return is only on your it doesn't come on the employer contribution but even if you're doing only rrsp you'll be ahead on the game compared to if you are doing TFS so if the employer is contributing to our recipe it's a no-brainer you have to and you should invest into rrsp first now let's talk about how to decide whether to do tfsa or rrsp and I have actually made a decision tree now like I said there are four reasons why you would not invest right now so if you have debt if you do not have emergency fund if you're saving for the house and if you're starting a business if the answer to any of these things or all of these things is yes then you do not invest but the if the answer to all of these things is no then you need to answer a few more questions then the first question that you ask is have you bought your first house and if the answer is no then you should invest in rrsp the reason for that is that like I said you can actually take out up to 35 000 from your rrsp account and if you have not bought your first house yet you should take advantage of that because that's tax savings that you will get on the 35 000 can actually be used towards the down payment again and thirty five thousand dollars is a substantial amount you'll probably get about five to seven thousand dollars of tax return and that can be used again for the down payment or the closing cost or whatever on your first house so if you have not bought your Faust house yet and if you are eligible for the rnst remember you will not be eligible if you have not taxed you know filed any taxes yet you should invest into rrsp first up to thirty five thousand dollars per person but if you are already a homeowner then you need to answer does your employer match rrsp and if they do like I said before and we explain that you'll be ahead on the game if the employer is matching invest in rrsp equal to the match if they are investing three percent then you invest three percent if they are matching six percent you invest six percent whatever they are matching the percentage you need to invest that amount into honor recipes so that you get 100 free money from the employer into your retirement savings now if your employer does not match like we discussed in scenario 1 in the previous slide you need to invest in your tfsa first and 2023 limit like I said is 6500 now after you have invested equal amounts that your employer is matching and you want to invest more money that is when you go towards tfsa and if you have exhausted your rrsp tfsa everything that's when you look at rrsp again because you can invest up to 18 and if you have done that then you go towards non-registered investing which is your normal Stock Investing into your investing account but coding minority mindset I'm just a random guy on YouTube and I would recommend that you look at your situation and then look at this decision tree and see what's relevant for you now let me talk about my investment strategy and I'll talk about frequency first it can be monthly or weekly and it can be daily as well if you are a daily Trader I am not I am a long term investor and therefore monthly and weekly makes the most sense to me and then there are certain people who will do it out of form of just because a friend said that you need to buy Tesla you just do it you just do it one off once in six months once in four months whenever you get a tip this is not the kind of investor I am I'm more of a long-term consistent investor and my strategy is to do it every week and the reason why I do it weekly is because of the recession and I want to do dollar cost averaging across every weeks because right now some weeks are low some weeks are high there's no consistency in the market and I want to take advantage of doing it every single week for the next 52 weeks now let's talk about the vehicles the first one is tfsa rlsp resp I invest about 1 000 500 for me 500 for similar into the rrsp into the tfsa account sorry and then I actually invest into my personal account and the reason why I do that and that can be different for you I would actually recommend if you are salaried you should actually invest whatever is above the your limit your tfsa limit into your rrsp because you will get a tax return but the things are different for me and the reason for that is I'm self-employed and because I'm self-employed most of my income is actually coming into my cooperation and if I take money out of my Corporation to invest into rrsp I'll first have to pay tax personal tax on the money that I take out for invest testing and then I'll get a tax return from rrsp and that's counterproductive and therefore the remainder of one thousand dollars or more sometimes actually goes into investing through my Corporation and that way I don't have the tax liability and yes I am not able to take the rrsp advantage but that's okay with me now let's talk about the platform I use very simple trade because it's probably the you know it's I just find it to be very convenient plus it's backed by power Corporation of Canada which is a 65 billion dollar comprehensive listed company it is protected by cipf and which is important to me which a lot of different brokerages are but I just feel that this is just backed by a much bigger organization the fee is actually pretty low unless you are investing into the U.S stocks and which is where I would either use Quest trade or I would buy the ten dollars per month premium account Premium Plus account for well simple trade which allows you to have lower fees on the U.S stocks as well and which is what I do because I don't want to manage two different you know platforms I just do it all on well simple and I've bought the 10 premium on well simple trade for anyone who is new to investing I'll put my referral Link in the description and you will get I think five or ten dollars when you join using that link I'll also get that same money and we both feel probably fund our coffees with it so uh yeah if you are new to wealth simple I really trust this platform and it's a it's a pretty good platform now I know the video has actually gotten very long but I just wanted to touch upon this as well what I actually buy in the market I'm not saying you should copy this but I'm just gonna tell you the thinking behind doing this the first strategy this is my favorite strategy and I've been doing it for a long time is I invest in the economy and if I have two thousand dollars a month I would invest half fit into the Canadian economy which is the top companies in Canada I'll invest in exchange traded funds which is ETS and the remaining one thousand dollars will go into S P 500 of us which is through vfv or vo you can use any of these stickers vfp is something that I do the returns are seven to eight percent on the Canadian companies overall long term and nine to ten percent and slightly higher sometimes on the S P 500 in the US and this actually makes sure that I at least have a eight percent return overall strategy number two and that's something that I would only recommend if you are a seasoned uh you know investor and if you have uh the time to actually go through the balance sheets of different companies uh this is something that Warren Buffett actually talks about in a lot of his books and biographies it's investing into individual stocks and then I personally have the strategy and sometimes I do it I I don't do it every single time I probably would invest about 500 into specific companies but the strategy is that I invest into brands that I believe in and use and the second kind of company that I like to invest is Visa and Banks and I want to put it mildly but I can't it's because people take rash decisions and they make the banks and the credit card companies very very rich and I want part of it and therefore I invest in visa and the banks as well it's mostly Canadian banks that I invest in because that's where I live and it's just easier for me to track them um so yeah and again I would say make your own decisions you know do your own research and then invest into these companies but overall this was the chart that I would want to leave you with this is how you make a decision this is how I make a decision on my investing into TFS and rrsp and just so you know I don't have any of these so obviously you know this is a no for me I've already bought my house so does my employer do RSB matching I'm self-employed so the answer is no and therefore I invest into tfsn because I'm self-employed I do not invest anything into rrsp I just invest into real estate and I invest into non-resisted investing account through my Corporation so that I don't have to take the money out of my Corporation first pay the tax on that and then get an RSP Advantage it will just be counterproductive if I do that and therefore my investment strategy cannot be yours in this decision tree but that's where I have the decision tree and you can just use this that's all I have for today I hope you like this video I hope you are able to share this with someone who is confused who is new to investing and they are held by this video video in any way do tell me in the comments what you like the best about this video and do subscribe to the channel if you have not done that already there will be a lot of detailed content on topics like these and More in future on this channel bye bye

Channel: Grow with Nav

Views: 10,176

Keywords: TFSA, RRSP, investment, savings, financial planning, retirement, money management, personal finance, wealth building, investment strategy, tax-saving, retirement planning, investment advice, financial education, tax-free investment, long-term savings, financial goals, portfolio diversification, financial security, financial freedom.

Id: 9cIMJs8LJNg

Length: 20min 27sec (1227 seconds)

Published: Sat Jan 28 2023