Savings money is always a good idea. That said, it can be difficult to know where to put your money in order to get the best bang for your buck. There are plenty of options out there, but most of them are a gamble
When it comes to dealing with your hard earned money, not everyone is willing to take a gamble. If you are looking to save your money while earning some return on it, with little investment risk, we have put together some options for you. Keep in mind that you may have heard of some of these investments while others are alternative investments that can help your portfolio grow.
Investing Money as a Beginner
If you are just starting to venture into the investment market, there are plenty of investment assets available to you. That said, you need to start by figuring out what your risk appetite is. You can start with investing in options that have low to minimal risk, or you can take a larger chance.
When it comes to investing, it's important to remember that the market fluctuates. Some forms of investment may not have you seeing a higher return right away. You may need to invest long term in order to get your money's worth. Other times, you could actually risk losing a lot of money. That's why some types of investing are better for more experienced Canadian investors who have a more diversified portfolio in order to hedge their bets.
That brings us to another important part of investing, diversifying your portfolio. Having your money spread around in different investments versus just one investment not only mitigates your risk, but can actually increase your return more so than risking it all on one lump sum high return investment. While you can win big on those, it isn't alway the case or the smartest financial decision. Especially, if you haven't done the research in order to help mitigate your risk.
One thing you should definitely remember as a new investor is capital gains taxes. These taxes need to be paid on certain investments that have been sold. The most common things that people pay capital gains on are real estate investments and stocks.
Best Low Risk Investments with High Return
When it comes to investing, the amount of options available to you can be scary. With all of the choices out there you just don't want to put a large sum into an investment and then lose money, when your intention was to gain more . Whether you are a beginner or an experienced investor, low risk investments are always a great idea, even if it's just to help diversify your portfolio. They are also great for those with a low risk tolerance but still want to invest.
High Interest Savings Accounts
One of the most low risk investments out there is a high interest savings account. These types of savings accounts offer higher interest rates than traditional savings accounts. With these accounts you are adding in money as often as you like and earning interest on that money.
Another thing you need to consider is if your money is safe. With a high interest savings account, you don't have to stress about whether your initial investment is safe. With your money invested in a registered financial institution, your funds are insured by the CDIC (Canada Deposit Insurance Corporation). Keep in mind though that most financial institutions are only insured for up to $100,000 per account, as per the Canadian Deposit Insurance Corporation. It's the closest to a guaranteed principal investment you can get.
GICs
GICS, also known as Guaranteed Investment Certificates, has some of the best returns for an investment that has a set guaranteed interest rate along with a set term. The set terms for GICs are anywhere between 1 and 5 years. They are actually very similar to term deposits.
When it comes to GICs, the higher the term, the better the return. That said, one of the drawbacks to GICs is that there are penalties if you cash them in early. This can result in you actually losing money. These types of investments are meant to be specifically used to save for specific goals.
Government of Canada Treasury Bills
Treasury Bills, or T-bills as you might know them as, are a great way to get a return on your money. The return may not be as high as other investments forms but, they are low risk, and a return is a return. In fact, a lot of wealthy investors make more of their money with a large quantity of low risk investments versus a small quantity of higher risk larger return investments.
Purchasing Treasury Bills is actually a very simple process. It can be purchased at most Canadian banks but there are a few things that you should pay attention to. The most important being the interest rate of the T-bill. This is because these are determined by the Bank of Canada's overnight interest rate. Other than that though, the process of earning money with T-bills is easy. Essentially you just purchase a T-bill at a discounted rate and then redeem them for the value you are actually worth.
Index Funds
Index funds are considered to be a type of mutual fund. That said, they are different in the sense that they passively track a specific market index. These can be made up of different things such as funds, stocks and bonds. These are already made up and add a lot of diversity to a portfolio.
Index funds aren't a way to make cash fast though. They focus more on long term growth. This is because they are a great way of providing access to all stocks that are in one single market. The way they are set up also prevents a large loss when stocks drop drastically and are also an easy way to invest because they are mostly passively managed. The fees are also quite low. The most common type of index funds that are purchased are ETFs (Exchange-Traded Funds).
Bonds
Bonds are one of the most common ways that investors diversify their portfolio. This helps them to mitigate their loss. This is because bonds are a way for you to essentially give a loan to the company. You purchase the bond and then get paid interest payments gradually. When you receive the payments depends on the bond.
There are different types of bonds that you can purchase. The ones available in Canada are:
- Government Bonds (Provincial or Federal Governments)
- Municipal Bonds
- High Yield Bonds/Junk Bonds
- Investment Grade Corporate Bonds
- Strip Coupon and Residual Bonds
- Provincial Bonds
They are different from stocks because stocks depend on the company's overall value. Bonds aren't influenced by this. Plus, with bonds, the longer you keep them the higher your return. The length of the bond really depends but you can choose to hold one from anywhere from 1 year to 30 years.
Mutual Funds
Mutual funds are a popular way for people to invest their money into RRSPs and save for retirement. They essentially are a make up of money from investors, stocks, bonds and/or other different kinds of assets. This makes them an inexpensive way to save money and to diversify their portfolio to mitigate risk of loss.
The reason they are so popular specifically to save for retirement is because you are then entered into the stock market without having to actively manage your portfolio. They also allow you to choose specific niches like technology or the biotech industry. You can also choose corporations that pay high dividends. Either way, the long term of this type of investment helps to ensure stock market return.
Fixed Annuities
These are another form of investment that people use in order to save for retirement. Unlike other forms of investment, these aren't purchased from a financial institution, they can be purchased from an insurance company. The lump sum that you pay to life insurance companies is then given back to you in smaller payments for the rest of your life.
Some benefits of fixed annuities are:
- Higher interest rates
- They offset the cost of inflation
- Guaranteed income stream
- Taxes are deferred until you start receiving payments
That said, it's important to keep in mind that when you put your money into annuities that you may not be able to pull it out. At least not until you start receiving your payments. Also, unlike RRSPs or mutual funds, you can't put money into annuities until you have reached retirement age. This means that you would have had to save the money somewhere else before you can invest in annuities.
Dividend ETFs
ETFs, also known as Exchange-Traded Funds, are another great way to diversify your portfolio because you are essentially a way to invest in a variety of assets at one time. These are actually quite similar to index funds. In fact, many ETFs are actually index funds.
The type of ETFs that have the lowest risk are dividend ETFs. These ETFs offer the highest interest rate and offer a steady source of income with monthly, quarterly or annual payments. ETF dividends are made of companies with a strong history of paying dividends making them a lower risk way to earn interest on your money. They also have low fees that are referred to as MERs or Management Expense Ratios.
Just like any other type of investment, you still need to do your research when investing in dividend ETFs. They may be lower risk but that doesn't mean that they hold no risk. Be sure to do your research before investing. The research can tell you a lot about the investment.
Dividend-Paying Stocks
When it comes to investing in stocks, there are many different types of stocks to choose from. That said, if you are looking for a high reward, low risk stock investment than dividend paying stocks are what you are looking for. This is because with dividend stocks, you are paid in regular cash payments. The reason these are considered to be more low risk is because these types of stocks are usually stable and profitable companies. When it comes to purchasing these stocks, you can purchase them from a broker.
Best Method of Investing Based on Amounts
When you are choosing to invest, the investing vehicle you choose isn't the only thing to consider. You should also consider how much you are investing. The amount can also make a large difference in what method that you choose, not just because some investment forms have a minimum investment amount.
Investing $1,000
If you are just starting out with investing and have $1,000 to invest, one of the best ways to do this is in a RRSP or a mutual fund. You can get a return on the money when you file your taxes, since it's tax free, as well as start to save for your retirement.
Another great way you can save $1,000 is by putting the money into a high interest savings account or a Tax Free Savings Account (TFSA), While you don't earn as much interest with either of these accounts that you may with riskier types of investing, there are no restrictions as to when you can take the money out.
Investing $10,000
With $10,000, there are quite a few ways you can invest your money. It really just depends on what you are comfortable with. You can invest in a low risk investment like an ETF, index funds, mutual funds or high interest saving accounts. That said though, there really is no best way to invest it. You have to do what's best for you.
It's important to keep in mind that some of the most low risk investments are also locked in so there is a penalty if you need to take the money out. That's why many investors diversify their investments. This means they don't invest their own money into just one thing. For example: with $10,000 you could put some money in a bunch of different places. Say you put $2,000 in a high interest savings account, then lock the rest into mutual funds, index funds and ETFs.
Investing $20,000
Investing a sum like $20,000 can be scary. $20,000 is a lot of money. You can do a lot of things with that. Maybe you are looking at purchasing a home or saving for the future. These types of decisions make a difference in where you wanna invest your money.
You can put this amount of money into a high interest savings account. Another option is to put it into an RRSP like a mutual fund or other investments that are similar. While these types of investments are usually long term for retirement, there are some circ*mstances where you are able to take out the funds without penalty. The most popular is the home buyers plan. This allows you to take the money out of your RRSP with no penalty in order to purchase your first home. You also have an extended amount of time to return the money.
That said, with RRSPs, you can also write off anything you put into your RRSP meaning that that amount of money is considered to be tax free, as long as you don't go over your yearly limit. So, on top of saving for your future you can also get a return with the money you invested.
Investing $500,000
With a lump sum of money like $500,000, you actually have a lot of options when it comes to investing. Some people may choose to invest into the real estate market. That said, it may not be the best time to invest in the market or the best option for you in general. If that's the case, another option is to invest in index funds.
Index funds are a low risk investment that are often recommended for high return low risk investments. If this is something you want to do it's best to do so through a financial advisor or an investment broker.
Investing for Young Adults
Whether you are a young adult just getting into the investing market, or an experienced investor, a great way to start or extend your investing journey is by opening a TFSA (Tax Free Savings Account).
TFSAs are just one of the fantastic low risk investment opportunities available and are a great way to save some tax while accumulating your money for a specific purchase, or just to have a savings account. You may be wondering how TFSAs are different from a regular savings account, well it's because they are tax free and there is a limit to what you are able to contribute every year. The limit depends on when you turned 18 or immigrated to Canada. The yearly limit for 2023 is $6,500.
Another great thing about a TFSA is the fact that you can withdraw the money whenever you like without a penalty. That said, it will impact your total contribution limit for the year. If you don't think this is the right kind of savings account for you, then a high interest savings account is another great option. Instead of saving tax, you will earn interest on what you contribute to the account.
Options Best for Short Term Investing
If long term investing isn't something that you are looking for then you may want to consider something more short term. The top two most recommended choices for short term investments are high interest savings accounts and short term bonds. This is not only because they can be cashed out without a penalty, but also because they are a good choice for lower risk investments.
As we have previously mentioned, high interest savings accounts are a great way to save money while earning some interest. You can also access the money whenever you want. If you want to earn a little more interest than a short term bond may be a great choice.
With bonds, whether they are corporate or government, you can get them for a short period or a long period of time. A 1 to 2 year bond can be a great way to earn some income while investing your money. Just make sure that you do your research before investing your money. There are plenty of bonds out there to choose from.
Best and Safest Overall Investment Option
The least risky form of investing is to go with a high interest savings account. This is because you aren't actually gambling any money. As long as the financial institution you are using is still active, then your money is safe. Even then, it's insured by the CDIC for up to $100,000. At the same time, you earn interest on that money. It's a great way to put a little money aside while letting your money earn for you.
Other Options to Invest Your Money
We have listed some of the best ways to invest your money for low risk and high return, but there are a few that didn't quite make the cut. That said, they can still be a great option for you. They aren't as high risk as some of the other investment choices out there.
- Dollar Savings Account: These accounts allow you to save your money with a great interest rate, usually in US dollars. This may not be a great investment for everyone, but if you are looking to save US dollars while earning interest, this could be an investment vehicle for you.
- Fixed Income Investments:This is essentially a broad term for all types of investments that have a fixed rate of return for an established period of time. It continues until their maturity date. It includes investment assets like stocks, bonds, ETFs and others that we haven't listed yet. They tend not to be higher risk investments though.
- Money Market Funds: These kinds of funds are similar to mutual funds. The difference is that they are invested in highly liquid, near-term investments. These are normally low risk high reward investments, but they are a bit more volatile with the rapid increase in inflation. It's important to do your research before investing in money market funds.
