Have you ever heard that expression, “you have to spend money to make money”? There’s a lot of truth to that statement. It’s not true all of the time, but it is most certainly true some of the time.
So then, the question becomes, what is the best way to spend money that will make money? There could be a lot of answers to that question but we’re going to go with, opening a brokerage account. Brokerage accounts give you somewhere to put your money that could potentially make you a lot more in return.
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What is a Brokerage Account?
Let’s start with the basics. A brokerage account is an account you deposit money into that you will then use to buy investments, like stocks or bonds. Would you open a brokerage account if you were struggling to make your rent every month? Well, probably not. Brokerage accounts are usually opened up when people are doing well with their money, and they want to put some extra money into something that has earnings potential.
It’s good to understand that with investment comes risk. If you’re not in a good place financially, you should work that out first, before trying to get into the investment world. Do not take money needed for your monthly expenses and put it into a brokerage account. There’s always a chance that you could lose the money, even if it’s very slim. You don’t want to end up in a position where you can’t pay your bills because you were hopeful that you could make extra money. You could cause yourself a lot of stress by doing that, so only put money in a brokerage account when you have a little extra.
Different Kinds of Brokerage Accounts
There are different kinds of brokerage accounts. You’ll want to know what they are before deciding on the right kind of account for your needs. So let’s go over them right now.
Discount Brokerage or Online Account
A discount brokerage account is pretty much an online account that you control yourself. You do all of the buying and selling through the online platform you are using. Companies like Questrade and Virtual Brokers are examples of platforms that provide discount brokerage accounts.
You’ll want to look at what costs are involved with opening the brokerage account with whatever provider you are trying to decide on. For instance, one thing you will notice about the Questrade fees is that they’re either lower than that of the competitors or they don’t have certain fees, like annual fees.
Brokerage Accounts with Management
Investing can be a nerve-racking experience for some people. That’s understandable. You don’t want to make a mistake and end up losing lots of money. Opening a managed brokerage account might make you feel more comfortable.
There are two different ways these accounts are managed. Your account can be managed by an actual person, or it can be robo-managed. Human management usually costs a bit more in fees than the robo-management does. Whichever type of management it is, the advisor manages your portfolio of investments and makes decisions on what to buy and sell to optimize your returns.
Registered Retirement Savings Plan – RRSP
You can open an RRSP to start putting money into that you want to use in retirement. The contributions you make to this account are taken off of your taxable income, so that will save you money in taxes, for now anyway. Eventually, you will be taxed on this money, but it is built so that you will be taxed at a lower rate because you’ll likely be in a lower tax bracket at the time you start withdrawing funds from this account.
It’s important to remember that this account is meant to be a long-term investment. You can withdraw from it if you need to, but you will be expected to pay the money back. The two ways you can take money out of an RRSP are under the Home Buyers Plan or the Lifelong Learning Plan.
Tax-Free Savings Plan – TFSA
If you open a TSFA, the money that you put into this account has already been taxed. After the age of 18, you can put up to $5,500 into the account every year. Like the RRSP, the TSFA can hold many different kinds of investments. You can withdraw from this account, but there is a funky rule about how you are allowed to put the money back that you took out.
If you’ve never had a TSFA, and you have a sizable amount of cash to put in it to start, you can open the account with an initial investment of up to $57,500. That’s more than it used to be. This gives you somewhere to put your money and keep it sheltered from additional taxes. Then if you end up needing some of that money, you can also take it out of there without being taxed for the withdrawal.
Find the Right Brokerage Account
The point here is to just do a little bit of research, and choose the right kind of brokerage account for you. If you want to make money on the money you have to turn it into a little bit of a bigger chunk, then put it somewhere that’s safe with some good earning potential.
Boris is a staff writer at TheFrisky.