Financial Literacy
Your Future $1,000,000
Ask yourself this, how much do you spend each day? Are you someone who constantly buys venti green tea frap from Starbucks (Yes, this is my guilty pleasure)? Assuming you did, that’s about $200 a month you’re spending. Well did you know that if you invest $200 a month for the next 40 years, you could turn that into $1,000,000. Sounds insane but here in this article, we explain to you why you should be saving and investing for your future.
How Do I save $1,000,000?
Alright, it’s time to show my work. Let’s say you’re ready to give up on the green tea frap and decided to open up an investment account instead. Although you are new to investing, you did a little bit of research and decided to invest in both Canadian and US markets. You have decided to reallocate the $200 that you saved each month and invested half ($100) in S&P/TSX Composite Total Return index, which contains about 250 of Canada’s largest public companies and the other half (100) in S&P 500 index, which contains 500 of US’s largest public companies. According to historical data for the past 50 years (1969-2019), the average annual return for S&P/TSX Composite Total Return Index and S&P500 index (converted in Canadian dollars) was 9.1% and 11% respectively. Over the next 40 years, you continue to save $200 a month and by the end of it, you would have saved $96,000. That might not seem like a lot of money but you didn’t just save your money but rather invested it. The $48,000 that you invested in the S&P/TSX Composite Total Return index would be worth $385,575.57 and the $48,000 that you invested in the S&P 500 index would be worth $684,728.60, after adjusting for conversion to Canadian dollars. In total, your investment portfolio is worth $1,070,304.17. Congratulations, you can become a millionaire just from making a wise financial decision.
What's The Catch?
While on paper, becoming a millionaire sounds simple, it is certainly a simplification of the process. Here are some of the limitation:
- Assumption using past returns. Past returns do not provide an indication of what the future holds. That said, we can see that over time those who have stayed invested in stocks have largely been rewarded.
- Assumption of 0 fees. When trading stocks, it very important to be aware about all potential fees associated with it. With that said, there are low and $0 commission trading platforms such as Wealthsimple Trade. In addition, the management expense ratio fee for passive index funds are quite low, 0.05% for the S&P/TSX Composite Total Return index and 0.03% for the S&P 500 index.
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Assumption of 0 capital gains tax. In order to buy or sell certain investments, such as stock and bonds, you’ll need to open an investment account that are typically non-registered government savings accounts or plans. Whenever you are able to capture any realized capital gains, that means you successfully sold your investments at a higher price than what you originally paid for. In Canada, capital gains are taxable and you will need to report it when filing your taxes every year. As such, it is very important to take advantaged of registered plans and accounts such as a Registered Retirement Savings Plan (RRSP) or a Tax-free Savings Account (TFSA). Within these programs, you don’t have to worry about capital gains and losses because the investments are tax-sheltered. It is important to do further research to see which registered plan or account is right for you.
I don't have $200 To Spare!
That’s perfectly alright. We are all at different stages of life but we should all try to prepare ourselves for retirement and when we’re no longer active in the work force. It is important to get into the habit of paying yourself first and it can be as little as $20 a month; you’ll thank yourself later in the future.
Can't I Save Later?
Although you can definitely save and invest your money later, know that you’re missing out on the effects of compound returns from being invested in the stock market. At a 11% average annual return rate, your 1$ saved and invested now is worth $2.84 in 10 years, $8.04 in 20 years, $22.89 in 30 years and $65 in 40 years. That is the price you may pay for saving and investing later.
What Should I do Next?
The best time to invest is yesterday, the second best time to invest is today. We advise you to speak to a professional financial planner and get active in your retirement and savings plan. A little effort now goes a long way.
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