What to do with $100,000 now
The 3rd installment in our Double Your Money Faster series.
The 3rd installment in our Double Your Money Faster series.
Looking back on his extraordinary investing track record Berkshire Hathaway vice chairman, Charles Munger, once said: “The first $100,000 is a bitch.” Scrimping together this size of a portfolio can be a daunting task. But once there, it’s time to rejoice. That’s because you’ve entered what financial planners like to call the “mass-affluent” class of investor. Options open up and saving for a comfortable retirement starts to look more attainable. Of course, doubling your money will still require hard work and a bit of grit. Whether you’ve earned your money through long work days, sold a property for a sizeable profit, or come into an inheritance, we’ve got a few tips to help you grow your portfolio.
Invest in RESPs
Ask Jeremy Mercer, 43, what he’ll do with his tax refund this year and he doesn’t hesitate. “Before I’m tempted to spend it, I’ll contribute $10,000 to my kids’ Registered Education Savings Plans,” says Jeremy, an engineer who lives in Edmonton with wife Jennifer, 41, and two young kids. A savvy do-it-yourself investor, Jeremy buys dividend-paying stocks for the kids’ education accounts. The RESPs hold Canadian bank stocks, Pizza Pizza, Parkland Fuel Corp. and other blue chips.
Jeremy chose RESPs because of their potential to double his investment rapidly. A contribution of $10,000 in his children’s RESPs today, assuming a 6% annual return and the payment of the Canada Education Savings Grant (CESG), will double to $20,000 in just 10 years—when his kids will be at post-secondary schools. Every child born in Canada accrues $2,500 worth of grant eligible room each year till age 17. The CESG gives each child 20% on each dollar of the first $2,500 saved in an RESP each year. Depending on net family income, you may be able to receive an extra 10% to 20% on every dollar of the first $500 you save. The lifetime maximum CESG grant is $7,200 per child.
But it gets better. Besides free grant money, Jeremy loves that there are no taxes payable on money earned in RESPs until it’s withdrawn. When RESP grants and earnings are withdrawn by the child for educational reasons, they are taxed at the student’s tax rate, which is usually lower. Most students have an effective tax rate of zero, meaning that your original contributions, the grant money, interest, dividends and capital gains can be withdrawn almost tax-free in any year the child attends post secondary education.
Buy a franchise
As an undergrad in the 1970s, Greig Clark started a painting company to pay for school. That first summer he earned $3,000. By 1978, he’d spun his business into 88 College Pro Painters franchises that earned a combined $40 million. “I taught students how to do as well as me, or better—that was the key to success,” says Clark, who spends his time championing 40 Oaks, a residence for the homeless. He sold College Pro in 1989, but aspiring entrepreneurs looking to replicate his success can benefit from his proven model and buy a franchise.
Franchisees need to do their homework. Research by Wayne State University economist Timothy Bates shows only 62% of franchises still operate after four years. The main reason: lack of profitability. If considering a franchise, do your research and factor in all costs, including start-up and royalty fees.
A condo in Florida
Real estate investors aren’t overly concerned about a potential Canadian housing crash. That’s because they’ve been shopping for properties south of the border. Don’t pick a property just because it’s cheap. A $46,000 condo in Florida may sound enticing, but it could be in a neighbourhood known for crime and vandalism. To avoid such pitfalls, examine the neighbourhood, the local economy, crime rates and potential rental income—all information readily available online. Also, calculate overall costs for maintaining the property and become familiar with U.S. and Canadian tax-filing requirements. Your priority should be cash-flow positive rental income, as making money through price appreciation is far more speculative.
Clear your debts
Recently a MoneySense reader wrote in asking for help. At age 31 she and her husband had finished university and landed good jobs, but were crippled by more than $75,000 in student loans—$25,000 of it on credit cards. Suddenly the reader received a $100,000 inheritance. She wanted to know if it would be wise to use the money as a down payment on a home. Despite the urge to splurge, your first step should be to pay off all non-deductible debt. Non-deductible debts are loans that are not tax deductible, including mortgages, unpaid credit-card balances, car or student loans and personal lines of credit.
“Don’t assume you need to spend or invest the money,” says David Lloyd, chief wealth officer at Newport Partners. Sage advice considering the average Canadian carries $26,768 in non-mortgage debt. So where is the best place to start? Try to pay off all high-interest loans first.
By eliminating $50,000 in student loans, our reader saves $23,000 in interest over the next 10 years. Paying off high-interest credit cards saves a further $19,000. Together, the debt repayment equates to a 42% return on investment, still leaving our reader with $25,000 for a down payment on a home.
Hire a pro to manage your money
When investing, possibilities open up once a portfolio passes $100,000. For a big pay-off you could risk it all on an up-and-coming stock like Netflix. If you’d bought $100,000 of shares in the online media streaming company on June 1, 2012, at $62.95/share, and sold on Feb. 15, 2013, at $189.51/share, you’d have tripled your money—making a quick $201,048 profit. But risking it all on an individual stocks is a strategy that appeals only to those with a very high risk tolerance.
For the rest of us, once a portfolio is this large, professional financial advisers will be all too happy to help you out. While investment counsel will charge annual fees of 1% or more of your portfolio, customized portfolios set up with the appropriate asset allocation will perform better in the long run. Start with a detailed written investment policy that describes your goals and strategy, says Brinsley Saleken, a fee-only financial planner with MacDonald, Shymko & Co. Ltd. This helps your planner ensure your goals don’t get derailed by fear, emotions, or short-term economic conditions.
What are some good investments to hold in your portfolio these days? David Lloyd at Newport Partners advises against holding government bonds because interest rates are so low. He prefers mortgage-backed securities, high-yield bonds or REITs. Or consider low-fee mutual funds like those offered by Phillips, Hager & North or Steadyhand. If you lack interest in the market, consider ETFs or index mutual funds like the TD e-Series Funds. They move with market indexes, require little investment savvy and cost less than actively-managed funds.
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