Investing as a Post-secondary Student
By iA Private Wealth, September 15, 2021
Apartment rented for the school year? Check. Class schedule finalized? Check. Laptop in good working order? Check. Investment portfolio optimized? Check.
If the last point seems out of place to you, you’re not alone. Most post-secondary students have many things on their mind, but investing usually isn’t one of them.
Benefit from compounding
One significant advantage that young investors have is a long time horizon. When they start investing at an early age, they’ve got the power of compound growth on their side. As the value of their investments gradually rises, that growth in invested capital will grow as well, and it’s this ongoing compounding that results in accumulated wealth over time.
Also, having an extended time horizon means they can invest more aggressively than someone older. Why? Because when younger investors experience the inevitable short-term market declines, they have the time to stay invested and ride out these downturns until the markets resume their long-term upward trend.
Few post-secondary students have a lot of money laying around, but it’s no reason to put off investing. Maybe they received cash gifts for birthdays or other special occasions. Many students have part-time jobs during the school year and perhaps full-time work in the summer. Of course it makes sense to ease their debt load when possible to reduce interest charges, but earmarking even a few dollars per month for investing can help create long-term wealth.
Assuming they have some money available to invest, what can they do with those funds? They might consider a Tax-Free Savings Account (TFSA). If they’re at least 18 years old with a valid Social Insurance Number, they can open a TFSA at any qualifying financial institution in Canada. The maximum annual contribution amount is currently $6,000. The good thing is, if they don’t contribute the full amount each year, they accumulate contribution room for future years. Whatever investment growth is earned in a TFSA is completely tax free.
If they have employment income, they might consider a Registered Retirement Savings Plan (RRSP). They can get a tax deduction each year, which may be useful depending on their income level, but the main benefit is that any growth of RRSP assets is tax deferred until withdrawn, which is typically not until retirement.
If students aren’t sure what to invest in, they can conduct their own research to learn the fundamentals of investing. They may also consider working with an Investment Advisor who can guide them and be available to help with more complex financial issues as they progress through the various phases of life.
Regardless of what they choose to invest in, it’s often valuable to set up a pre-authorized contribution plan (PAC) that devotes a certain amount of money at pre-determined intervals (e.g., monthly). PACs are useful and convenient because they help investors be disciplined and automatically invest on a regular basis to build long-term wealth.