Canto 3

Should You Invest?

Yes and no.

Yes

Everyone is going to tell you to start your investing early. This is because of the amazing power of compound interest. Here's some math:

Let's say you plan to put money into some investments that will average a 5% annual return over and above inflation. That's not an unreasonable expectation for stock market investments over the long term. You plan to retire at 65. If you put $1000 into the account at different ages, here's what it will be worth when you turn 65 (remember this is after inflation, so the actual amounts would be more than this):

• Put in at 25, worth $7,040 at 65
• Put in at 35, worth $4,322 at 65
• Put in at 45, worth $2,653 at 65
• Put in at 55, worth $1,629 at 65

Here's some more math. If you want a quick way of finding out how fast an investment will grow, use a rule of thumb called variously the "Rule of 70" or the "Rule of 72." If you divide 70 or 72 (whichever makes the math easier) by the interest rate you expect, it gives you the number of years until the investment doubles. So if you're making 8% per year, 72/8 = 9, so you should expect your investment to double in about 9 years.

Anyway, all this math is just to say that if you start saving earlier, you have more money at the end. Pretty obvious, but the numbers above are striking.

No

There are lots of reasons why it might not make sense to get involved with the stock or bond market at this stage. Here are a few:

• You're working in the summer to save money for the following school year. The time between putting the money aside and needing to use it is so short that you really shouldn't take the risk that the value of your investments might fall. Stick with investments in the cash category or just keep your money in a good savings account. The on-line ones tend to pay more interest.
• You're still in university and your best investment is in your own skills and qualifications. The return on an investment in education is pretty good and likely more reliable than the stock market. If you have to choose between the two, invest in yourself first.
• You make too little money to owe taxes at the moment. If that's the case, it makes no sense at all to open a registered retirement savings plan (RRSP) or something of that sort. You'll probably be paying a higher tax rate than zero when you take the money out, so you'd be transfering income from a year when you don't pay taxes on it into a year when you do. That's just dumb.

Everyone's situation is different, but the basic rule is that if the main things you need money for are coming up fast (less than five years) you should be saving or using cash type investments, and if the things you want to save for are long term (like retirement, education for your children, or down payment on a house) you should be investing on stocks or bonds.

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