A Full House-Style Life Lesson (in Personal Finance)
What ever happened to predictability?
What if the milkman didn’t put his money into a retirement savings plan? Where is he now? Did the paperboy invest early in Facebook stock and is now enjoying his young adulthood on a beach in Fiji?
With the Fuller House reboot hitting Netflix today after 20 years off the air, we were inspired to give a lesson (worthy of Danny Tanner) to refresh your personal finance knowledge and help you prepare yourself for your next two decades.
The variety of account and investment options available can be confusing, but much like our favourite San Francisco family, they have their own individual personalities.
RESPs (the Danny Tanner)
Danny Tanner, the patriarch of this television world, was focused on raising his three children and ensuring they were growing into well-rounded adults. His finance personality is the RESP. These are tax shelters, similar to a TFSA or RRSP, but are specifically for helping save for a child’s post-secondary education. You can hold all kinds of investments including cash, GICs, mutual funds, stocks, bonds, and more.
Mutual funds (the DJ, Stephanie, and Michelle Tanner)
Our three sisters are unique individuals with their own quirks and features. You could consider them the mutual funds of the Tanner portfolio. You are buying a unit but a much more diversified one than a specific stock or bond. A mutual fund is a collection of investments, such as stocks or bonds. When you buy a mutual fund, you’re combining your money alongside other investors, and a portfolio manager handles the whole fund. Like the sisters, these funds work best as a team.
Exchange-traded funds (the Kimmy Gibbler)
Exchange-traded funds (ETFs) have been around for upwards of 25 years, but most people still find them confusing and are unsure what to do with them! Similar to the Tanner sisters, an ETF is also a fund that holds a basket of stocks or bonds and is managed by a portfolio manager; it allows you to diversify your portfolio by holding a variety of stocks or bonds. But ETFs are less expensive to own because they take less parenting management, and they’re a bit flighty because they’ll experience price changes throughout the day as they’re bought and sold. Much like Kimmy, an ETF’s charm is in its tendency to be all over the place. Aside from GICs and high-interest savings, ETFs are another one of many investment options for your TFSA and you can also hold an ETF in an RRSP or RESP.
Bonus: Understanding the fees associated with mutual funds and ETFs
Mutual funds and ETFs both charge a fee called a management expense ratio (MER). An index fund typically has an MER of between 0.3% and 0.75%. Actively managed mutual funds charge a lot more (an MER of 2% or higher is common). Over time, high fees on these funds can erode your investment returns. There are ETFs with MERs as low as 0.05%, although many charge between 0.2% and 0.4%. Note that you’ll often need to pay a commission each time you buy or sell an ETF so if you trade a lot, your investment returns could be lower. There are a few brokerages that’ll waive this fee on some ETFs.
GICs (the Joey Gladstone)
Joey is sweet, safe, and dependable. As reliable as Joey’s Popeye impression each episode, the great thing about a GIC is that your investment is guaranteed. Unlike more volatile investments such as stocks, GICs shelter investors from the possibility of a loss due to market fluctuations. GICs don’t generally hold the promise of very high returns (note: you could have picked up a five-year GIC with an interest rate of more than 9% when Full House premiered in 1987), but they’re considered safe, conservative investments. GICs can also help fulfil the fixed income component of a diversified investment portfolio.
Stocks (the Uncle Jesse)
Investing in stocks can be risky business. It’s the leather jacket and rock ‘n’ roll band of investing. When you purchase a stock, you’re buying a piece of a company. Shares are traded on exchanges such as the Toronto Stock Exchange or the New York Stock Exchange. You can buy shares of companies in different industries, such as financial services, energy, technology, and natural resources. Buying just one stock can be risky so you should buy at least 10 stocks of companies in different industries in order to build a diversified portfolio.
RRSPs (the Aunt Becky)
Rebecca and Jesse are the epitome of opposites attract. Her grounded personality balances Jesse’s wild side. She’s the RRSP contribution of the household; she was the catalyst for Jesse to settle down in his future. RRSPs are designed to help you save for retirement and they should be part of your long-term savings goals, like for retirement or to purchase your first home. (Get out of that attic!)
Bonds (the Comet)
Like the steadfast loyal family pet, bonds simply mean you’re lending a company your money and, in return, they pay you back with a pre-specified amount of interest. Typically, bonds are lower-risk investments and are inversely proportional to the stock market.
TFSA (the Full House house)
A TFSA is simply a tax shelter for your investments—a roof to put your investments under. It protects investments, allowing them to grow tax-free. And just like the now-infamous Painted Lady home in SF, you can put much more than meets the eye under this roof. Almost all investments are welcome: GICs, bonds, stocks, mutual funds, and savings accounts can be held in a TFSA. Even though they are not tax-deductible, place your investments in a TFSA home and they’ll be safe and sheltered from the perils of taxation, and you can withdraw them at any time, tax-free. They’re also great for preparing for life’s little bumps in the road—the scraped knees and broken hearts of your budget—and we recommend using them to save up for shorter-term use like buying a car or another larger purchases within a few years.