There is an infinite number of ways to invest money in Canada, whether that is registered accounts (RRSPs, TFSAs, etc.), real estate, taxable investing accounts, private lending, investing in your own/private businesses. Because of all these options, it’s incredibly hard to know where to put your hard earned money. What I’m trying to do is present my personal order of how to allocate investments, showing you where I’d put my money first, and why.
Before you start investing your money. I encourage you to pay off any high interest debts (e.g. credit cards), and set up an emergency fund (typically 3-6 months of expenses). This ensures if you need quick access to cash, you have it ready.
Here’s my order of allocation of investments:
Allocate Investments to Take Advantage of Registered Accounts
Registered accounts present huge tax advantages, and should be the first place you look to allocate investments.
- Employer RRSP Matching
- A lot of employers offer an RRSP contribution match up to a certain percentage or dollar amount. For example your employer may match your RRSP contributions up to 5% of your salary. So up to that 5%, for every dollar you contributed, they’d contribute a second. This is the equivalent to a 100% return, guaranteed. I don’t know of many investments that offer that kind of return so this is the first place I’d put savings. If I still had more savings after this contribution, the next place I’d put money is:
- RESP Contribution (Up to $2,500 annually)
- This one has the caveat that you have kids, but if you do the government will offer you an additional 20% on your contributions (up to $2,500 per child). Similar to the above, this is essentially a guaranteed 20% return (though on a relatively small dollar amount). Past this $2,500 amount, the next place I’d put money is:
- FHSA (if you’re still qualify as a first time home buyer)
- The First Home Savings Account is tax deductable and allows for tax-free growth. If you can still qualify as a first time home buyer, this is a great way to be able to quickly save for a downpayment on your first home. It also has less restrictions compared to using your RRSP for purchasing a home. I would contribute a good portion of my savings to this, recognizing that they’re still locked in until I purchase a home. If home ownership is not a high priority for you, you can skip this one. I would also allocate some savings to:
- TFSA
- I personally believe the TFSA is the most powerful of the registered accounts, purely due to its tax advantages and it’s flexibility (you can withdraw at any time, for any reason). I would put as much savings as I had left into my TFSA until I reached my contribution limit.
Individualized Investment Allocation
After taking advantage of the registered accounts, you get into your individual preferences for how to allocate investments. At this stage, the ordering of the investments, really depend on the individual, where they are at their stage of life, and what investments suit them. That said, here’s my ordering, and why:
- RRSP (Until you reach $35k)
- I am still eligible for the Home Buyers Program (HBP) as I haven’t purchased before. As such, that first $35,000 in my RRSP can be used to purchase a home, and by contributing to my RRSP to get there, I can save on taxes to accelerate the growth. That said, once I pass the $35,000 range, I can’t access that money anymore until retirement. As such, after that point, I’ll start putting money elsewhere:
- Real Estate
- I am a huge believer in real estate as a wealth building mechanism. As such, I am allocating as much savings as I can towards saving for investment real estate. Now I recognize real estate is not for everyone, so you may exclude this investment type from your portfolio, and instead focus on investing in the stock market or other investment methods.
- RRSP Fill-Up
- At this stage, if you still have additional funds, you can continue to contribute to your RRSP until you reach your contribution limit. Though RRSPs have tax deferral advantages, they also have limitations, particularly related to access to capital, as such, maxing out your RRSP may come after allocating funds to other investment types.
- Other Investments
- If you still have additional savings to allocate after maxing out your RRSP, you can explore alternative investments. This could be a taxable investment account, private businesses, side hustles, art, etc. Now it’s important to highlight that these don’t have to necessarily come at the end. Depending on the opportunities present, or what investments fit your taste, these could come higher on the list.
Conclusion
What’s presented above represents one single manner to allocate investments. You should assess what investments fit best with your personality and risk appetite. Depending on your stage of life, or what your financial goals are this can also be dynamic. For example, you may be entrepreneurial and pursuing a side hustle may be higher on your list. Or you may be nearing retirement so maximizing your RRSP is your top priority. What is important is that you’re being intentional with where you put your money.
With that said, I do believe taking advantage of registered accounts should be near the top of your list. They can provide great returns/benefits that are tough to find elsewhere. To learn more about registered accounts see here:
For tips on taking action with your investing, see here: The 85% Solution – How to Take Action on Hard Tasks, and Get Moving In The Right Direction