Trevor Abes: Writer

Tag: compound interest

Young Canadian Investor #22 — Ten Financial Concepts They Should Teach You in School

We’d all be a little better off if Canada’s basic education system included a thorough run through of basic finance. Such a course would allow young people to make better decisions with their money and ultimately keep more of it in their pockets. Nowadays, making mistakes with money is almost normalized as part of the journey toward managing it well, and there’s really no reason that should be the case with the right financial foundation.

Here are ten concepts that might serve as the base of that foundation.

Inflation is the sustained rise in the prices of goods and services people use in their everyday lives. A pack of bacon twenty years ago was a lot cheaper than a pack of bacon today because of inflation. The same can be said for orange juice, cars, houses, bathroom tissue, and pretty much anything else you need to live your life. We invest money in stocks because they offer a return that has beaten inflation over time. While you can buy approximately 3.3% less with a Canadian dollar with each passing year, a diversified stock portfolio would have earned you an average yearly return in the high single digits over the past few decades.

Debt is what you take on when you borrow money. Usually the agreement is that you have to pay your lender back the full borrowed amount, aka the principal, after a certain period, plus periodic interest payments along the way. These interest payments tend to be expressed as a percentage of the total borrowed amount payable in monthly, annual, or biannual installments depending on the arrangement. One well-known example is credit card debt, which is some of the highest-interest debt you can incur at about 20% or so per year. On the flipside, no pun intended, taking out debt, aka a mortgage, to buy a house could be financed at only 3 or 4% because of Covid-19’s obliteration of housing demand.

Financial Independence means having enough money to finance your life’s expenses such that working becomes optional for you. We’re not talking about being rich here, just being able to support yourself and live with decency. The earlier kids know about this concept, the more years they’ll be able to save and invest and take advantage of compound interest.

Compound Interest is the process by which an investment grows in value. When an investment earns you interest, which is synonymous with a return, over one year, it’s added to the original amount you invested such that your $1000 is now $1200 for example. The $200 you earned in interest now has the opportunity to let the following year’s interest grow on top of it, essentially earning you interest on your interest as they compound into a higher amount.

Opportunity Cost is a perspective you can take when it comes to spending money. It consists of looking at what you’re about to spend, say $15 on a burger and fries, and considering what you’ll no longer be able to buy once you place your order. If you’re saving for a car, you won’t be able to put that money toward to car anymore. If you’re hoping to take a certain course to add depth to your skills, that $15 will no longer help you enroll. You get the idea. When you actually manage to hold off on dropping your cash on something in favor of a future desire, it’s called delayed gratification; not the easiest ask for young people looking to have a good time, but certainly a rewarding one in terms of making larger-scale dreams come true.

Investing is using money with the intention of making more of it. You invest in assets.

Assets are things you can own that make money. These include stocks, which rise in value and can pay you a bit of cash every month or quarter called a dividend. Bonds, which basically work the same as the lender-borrower relationship we delineated above, where the lender, or holder of the bond, receives regular interest payments and the return of principal at the end of the bond’s life. Real estate, which pays you monthly when you rent it out to people. Businesses that hopefully produce profits that line your pockets in proportion to the percentages of the businesses you own. Patents, which generally entitle you to a royalty for every time your patent is put to use. Guaranteed investment certificates, which, like bonds, function as debt. And so on. Think of how motivating it might be to have a working list of these in your head walking around as a daydreaming sixteen-year-old.

Retirement Planning is the last thing you want to talk to a high school kid about at length because it’s so far away and you gotta learn to live before worrying about the logistics of the end of it. I’d limit the spiel to saying that it’s a good idea to think about how much money you need to live on a yearly basis. Multiply that number by however many years between your age and 90, to be conservative, and that gives you a rough idea about how much money you would need until you croak. It can feel grim to think about death. I get it. Just wanted to acknowledge that.

Insurance is money you pay someone else to financially have your back in case something catastrophic happens to you, like croaking, getting seriously injured, losing your job, getting into a car accident, or having to deal with damage to your home. You get insurance for peace of mind. Your payments for it, called premiums, are ones you hope to make without ever having to file a claim due to this or that disaster. Knowing about insurance as a kid is important to instill the idea that certain things are worth protecting more than others, modified of course by each person’s individual values.

Taxes can be defined as money you pay the government to run the country you live in. The earlier little Timmy can develop a sense of what this means in hard numbers, the less of a surprise it’ll be compared to when those dollars have a tangible effect on his quality of life.

Feel free to drop a question or a comment.

I’m also offering investing 101 chats 1-on-1  over Zoom, Facebook, Skype, or Google Meet!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

Young Canadian Investor #10 – Common Investing Questions Answered

1. Don’t I need to already have a considerable amount of money to invest? Not anymore. It used to be commonplace for funds to have $1000 or $2500 minimums to invest, but you can now buy ETFs for free on Questrade without a commission, even if it’s one share at a time. And just for reference, the Vanguard FTSE All Cap Canada ETF, which invests in a basket of stocks meant to represent the entire Canadian stock market, currently trades for $26.03 per share.

2. What’s wrong with enjoying myself and my money now if life is short and you never know what could happen tomorrow? Nothing at all. In fact, another way to look at investing is as a way to prolong your enjoyment of life until the very end. It’s a trade-off, really, between putting a few dollars away without sacrificing too much in the now, and risking going broke when you can’t work anymore. Whether that means saving $100 a month or $10000, the point is that your future self will really appreciate it. 

3. This investing stuff is way too complicated for me. Has anyone put it all into plain language so I can educate myself at my own pace? Yes, indeed. Behold.


4. If investing in the stock market is so great over the long term, and helps set you up for a more comfy retirement, why do only about half of Canadians engage in it? Because holding stocks for decades requires a strong stomach. It isn’t easy to watch your globally diversified investment portfolio drop by 20% about every five years, and by a third to half or more every decade or so, on its way to providing you with an average 7% return.

5. What’s inflation? Inflation refers to the sustained rise in price that most goods experience over time. In Canada, it’s 2% a year or so, meaning that the 7% return mentioned above is actually 5% adjusted for inflation.

6. Isn’t a house a better investment than putting money in the stock market? No, because of the money it costs you to maintain and live in it. Here’s a detailed breakdown courtesy of Ben Felix, an investment and financial planning professional based in Ottawa.

7. Can’t I just save money instead of investing? Sure, so long as you’ll be able to give yourself the life you want when you’re older. If you save $300 a month for the next 20 years, you’ll have $72,372 by the end of it. If, instead, you invest that money, and earn a 7% return over the same period, you end up with $157,489. Give this compound interest calculator a whirl and figure out how much money you’ll need to lead your idea of a good life.

Feel free to drop any questions in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.



Young Canadian Investor #1 – Compounding is the Point

The point of investing is to use compound interest to get yourself closer to your financial goals. It can seem like magic at first, but compounding simply refers to how an investment will grow exponentially if you regularly contribute to it and allow it to grow over large periods of time.


The bike is metaphorical. It represents your financial journey. It’s a stock image; you got me. Pun intended.

$1 invested that grows on average 7% per year will become $3.87 in 20 years.

$1 invested with monthly $1 contributions that grows on average 7% per year becomes $511.41 in 20 years.

When it comes to putting money away for the benefit of your future self, there really isn’t much else to say.

That said, to make compounding work for you, you need to know which investments have the best expected return, which of them fit your financial situation, and how to go about acquiring them. To learn a little bit more about getting started, you can pick up my intro to investing here.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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