# Clueless



## Mirage (Jan 1, 2016)

Hello everyone,

I found out about this forum a few days ago, when as a new year resolution I decided to (finally) do something about financial planning, after many years of single-minded focus on my career.

After reading a reasonable amount of posts I recognize myself in the category of reasonably high earners with no clue whatsoever about managing my finances (from the TFSA thread).

My situation is therefore as follows (please don't shoot me):

- 41, single income, wife in grad school (for 2-3 more years), 7yo kid
- ~$500k in cash, sitting in a regular bank CAD savings account
- ~$220k/year gross income
- renting a house for $3k/month (we like where we live and have only vaguely considered buying)
- two properties abroad, currently not used to generate rental income, but in the fullness of time we could retire there
- no RRSP, no TFSA, no investments at all, nothing, zip
- no debt of any kind, besides a credit card I pay in full at the end of every month

I would like to start somewhere, and after a first conversation with my bank manager (HSBC Premier), they recommended something like following to diversify the investments:

- $250k as downpayment for either a ~$800k property to live in, or as downpayment for a ~$500k rental property
- $100k to max out both TFSAs and use them to invest in fairly aggressive mutual funds
- $100k to put into RRSP
- start contributing $1k or so monthly to the RRSP or to an unregistered 
- put any yearly bonus, or additional one-off income straight into the mortgage

Does any of the above sound reasonable to you?

Reading around here I understand many (most?) of you manage your finances directly, and have an investment plan according to some strong recommendations such as the sleepy portfolio...

Would it be worth going to a different bank?

While I am certainly not asking this most excellent community to become my financial planner, I would really appreciate if anyone could point me in a reasonable general direction, I will then start writing my diary in the appropriate section.

Thank you in advance.

Mirage


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## mind_business (Sep 24, 2011)

That's an envious cash position. Definitely time to get it working for you. 

I'm curious about your timeline for each activity. For example, it's probably not advantageous to dump 100k into an RRSP within one year. You may want to split this up into multiple years to give you the best bang for your buck. 

Typical mortgages allow you to increase payments in multiple ways: 1) increase regular payment by 10% 2) then double up this payment each pay period 3) annual lump sum of 10% of original mortgage amount. If you can afford it, which it looks like you can, this is a relatively fast way of paying down a mortgage without penalty. Something for consideration.

Definitely max out TFSA(s) ASAP. Check out TFSA vs RRSP rules to see which one is more advantageous for aggressive investment, and which one is better for holding foreign investments.

And have fun doing it


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## vi123 (Oct 29, 2015)

Rule #1 
Don't buy anything that the bank is trying to sell you.


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## Eclectic12 (Oct 20, 2010)

Welcome to the forum. 

What will make the most difference is to learn at your own pace. It is difficult to be sure of the plan plus manage risks where one does not understand the choices. There are also a lot of people who handed off to a MF or advisor then learned others were making more. 


From this perspective ... I don't like buying the rental property. There are too many risks IMO. Jumping into buying a house also seems too early, especially as the Canadian economy and possibly the housing market could be dropping.


I would max the TFSA (numbers look rounder up to me but I would need to calculate it to be sure). If you are not sure of the investment strategy, you can park the $$$ in a liquid investment then move it into what you decide later. Make sure you are clear on the rules and if you anticipate buying a longer term investment before 2017, make sure the TFSA setup allows a suitable range.

For the MF that is recommended, what is the Mer? Are there penalties for selling early?


For the RRSP, what are the sources of retirement income?
Others sources such as a pension may influence how much to put in or how desireable ithe is.



If you are interested in the couchouse potatoes strategy, check out Google the Canadian Coach Potato Web site for info.


I will stop here for now.


Cheers


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## NorthKC (Apr 1, 2013)

First of all, welcome! Second, you're in a fantastic position and you're correct in that you need to start working on that cash.

Everyone above has given you great points so far. Maxing out TFSA right now will put you in a great spot for now.

I've noticed that you have a 7-year old son. You should consider setting up an RESP for him as well. I'm not sure on the exact details but I believe that you can carry-back the grants to a point and then contribute enough each year to get the max from the government. I will let everyone else here chime in on this.


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## Just a Guy (Mar 27, 2012)

I agree, max out your tfsa and do the $2500/year resps (get the free cash top ups), I wouldn't max out the resps, just do enough to get the max grants. Watch out for bank products, a good place to start is something like the couch potato strategy until you learn more.

As for rental properties, adjust your thinking. You want to put as little of your own money into them, and leverage them as much as possible. The interest is a tax write off against the income you generate and the profits come from someone else paying the bills. Also, make sure you understand the difference between a home and an investment property, not every property is a good investment (in fact, these days they are few and far between). Read up on the real estate forum to learn more about proper cash flowing properties and learn what to avoid. Feel free to ask a lot of questions.

Your best bet would be to move the $500k rental money and pay down your personal mortgage, then get a home equity line of credit (heloc) on the house and use that to buy your rentals as the deposit portion (you can usually get a 75-80% LTV mortgage on a rental). Then you've financed the property 100%.


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## RCB (Jan 11, 2014)

Yes, you can dump 2 x $2,500 annually into the RESP to catch up on those lost grant years, until you are caught up. One "back year" grant is given each contribution year that you do so. That's a 20% return on investment right there, not including how your contribution is invested.

I would advise against purchasing a rental property if you hadn't already decided to invest that time. Market is high, and do you want a phone call in the middle of the night that the water heater has failed, or the dishwasher isn't filling? I am a landlord to GET to where you are.


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## Just a Guy (Mar 27, 2012)

Rarely do you get a call in the middle of the night for a dishwasher (who washes dishes in the middle of the night, let alone stays up to ward if something goes wrong) or does a hot water tank fail (again, who stays up to notice). 

Yes, being a landlord is work, but it's a lot less work and hassle than people make it out to be...and it's a lot less work for the money compared to most jobs...yet people would rather the stress and hassles of a job.


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## Mirage (Jan 1, 2016)

Thank you all very much, it is very refreshing to get this kind of support and advice!

My biggest concerns right now are:
- given the amount of money we pay in rent, would it be worth buying a house even though the market is so hot (Toronto)?
- terms of RRSP, what makes the difference between topping up all the missed contributions in one go, rather than splitting up into multiple years?
- would it be a good idea to contact a financial planner, a tax advisor, both, at least to get started? if so, how to find them?

I think I will start at the very least by maximizing the TFSA for both myself and my wife...

Then the couch potato strategy may be what I do next, as given my current ineptitude at finance, I prefer to stick to what has worked for others, even though of course the risks are not null.

The RESP for my daughter sounds reasonable too.

Mirage


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## mind_business (Sep 24, 2011)

Mirage said:


> - terms of RRSP, what makes the difference between topping up all the missed contributions in one go, rather than splitting up into multiple years?


You need to understand the concept of MTR (Marginal Tax Rate). This is the amount of tax you pay on the last dollar you earned during that year. It's always taxed at the highest possible tax bracket. When contributing to RRSP(s), you are removing that contribution amount directly from the taxable income you are going to pay. Therefore your contribution will be removing income that would normally be taxed at that higher rate ... which is a good thing.

Here's an example:

Using 2015 tax rates, the highest tax bracket in Ontario is when you make more than $220k per year. You would be paying 29% Federal Tax + 13.16% Provincial Tax = 42.16% total. If you had, say $240k taxable income per year, after all your other deductions were already considered, AND you then contributed $20,000 into an RRSP, you would have avoided paying ANY amount at the highest tax bracket ... WOOT! Essentially you've bumped down your MTR to the 2nd highest tax bracket. You could contribute more, and drop down another tax bracket, or two, or three ... but at some point it would be more advantageous to save some of the contributions for the following year when you can apply it to the highest tax bracket amounts. YOU have to decide the strategy on how much per year is going to yield the best bang for your buck.

Hopefully others more tax-savvy than myself add to this discussion. But this should give you an idea of the basics behind how RRSP contributions affect your MTR ... and thus maximize your tax refund.

[EDIT] ... I removed the sentence discussing amending past returns to use RRSP amounts. I'm not sure if this is possible. Hopefully others can confirm. 

Federal:
15.00% --- > Up to $44,701
22.00 ----- > $44,702–$89,401
26.00 ----- > $89,402–$138,586
29.00 ----- > $138,587 and greater

Provincial (Ontario):
5.05% ----- > Up to $40,922
9.15 ------- > $40,923–$81,847
11.16 ----- > $81,848–$150,000
12.16 ----- > $150,001–$220,000
13.16 ----- > $220,001 and greater


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## RCB (Jan 11, 2014)

Just a Guy said:


> Rarely do you get a call in the middle of the night for a dishwasher (who washes dishes in the middle of the night, let alone stays up to ward if something goes wrong) or does a hot water tank fail (again, who stays up to notice).
> 
> Yes, being a landlord is work, but it's a lot less work and hassle than people make it out to be...and it's a lot less work for the money compared to most jobs...yet people would rather the stress and hassles of a job.


While I agree with you regarding the stress and hassles of a job compared to rental properties, the OP hasn't stated this was an original thought, but something the bank suggested. Given the current RE climate, I would suggest the bank is trying to drum up further mortgage business, rather than truly offering good financial advice to the OP.

I have had middle of the night calls, mostly for lock-outs/lost keys. Most problem calls occur after business hours, as tenants are not home until then to discover the problem...like the midnight text that the furnace sounds wrong. I do deal strictly with students and younger tenants, however.


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## Taraz (Nov 24, 2013)

Don't buy a house or a rental unless they're actually priced reasonably in your area. Also, don't buy property unless you plan to stay there for at least 5 years. As a rule of thumb, a house priced at 15 times the annual rent is a fair value (i.e., not a good deal, not a bad deal). Do some research on rents for houses in your area. For rental properties, you want it to get at least 1% (preferably 2%) of the total price (e.g. purchase price plus renovations) in rent each month (so if you can get $1000 per month in rent, you could pay $100,000 k for the property). 

Most houses in Canada are overpriced. Remember that realtors and bankers stand to benefit financially when they convince you to buy a house - they probably aren't acting in your best interests.


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## GreatLaker (Mar 23, 2014)

Mirage said:


> - terms of RRSP, what makes the difference between topping up all the missed contributions in one go, rather than splitting up into multiple years?


You invest with the belief that you will get a positive return, thererfrore investing funds all at once usually gives better return. Vanguard has done some in-depth research that proves it. But there is always the possibility that markets will take a big dive just after you invest. If that would keep you up at night, then spreading it out over 6 months or a year may make sense. If you do that, create a specific plan to invest monthly or quarterly, and stick to it. Too many people get spooked and sit on cash for years, watching the market go up, missing huge gains.
https://www.bogleheads.org/wiki/Dollar_cost_averaging#Dollar_cost_averaging_versus_lump_sum
https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf



> - would it be a good idea to contact a financial planner, a tax advisor, both, at least to get started? if so, how to find them?


Here are some good starting resources:
http://www.finiki.org/wiki/Main_Page
http://www.amazon.ca/Millionaire-Teacher-Wealth-Should-Learned/dp/0470830069/
If You Can by William Bernstein is an excellent starter book on investing. Available free at this link: www.etf.com/docs/IfYouCan.pdf. It's american and aimed at young investors, but the author says more in 16 pages than many say in hundreds.

A financial planner may be worthwhile if you don't feel confident doing it on your own. A planner could evaluate if you need a tax advisor. Make sure you know how any FP is paid. Ones that get paid on commission (typical of big banks & brokers) have an inherent conflict of interest. They only have an obligation to sell you products that are suitable for you, not what is best for you. Using a fee only planner avoids that conflict.
There is a list of fee-only planners here: http://www.holypotato.net/?page_id=1332


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## Mirage (Jan 1, 2016)

Understood.

One last question: if I had any source of income in USD, would I be better off keeping it (and investing it) in USD or should I first convert it to CAD, given the very favorable exchange rate?

Thanks!

Mirage


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## Mirage (Jan 1, 2016)

GreatLaker said:


> You invest with the belief that you will get a positive return, thererfrore investing funds all at once usually gives better return. Vanguard has done some in-depth research that proves it. But there is always the possibility that markets will take a big dive just after you invest. If that would keep you up at night, then spreading it out over 6 months or a year may make sense. If you do that, create a specific plan to invest monthly or quarterly, and stick to it. Too many people get spooked and sit on cash for years, watching the market go up, missing huge gains.
> https://www.bogleheads.org/wiki/Dollar_cost_averaging#Dollar_cost_averaging_versus_lump_sum
> https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf
> 
> ...


This is amazing information, thank you so much!

The sentence "Too many people get spooked and sit on cash for years, watching the market go up, missing huge gains." pretty much depicts me.

Mirage


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## Underworld (Aug 26, 2009)

Firstly, congratulations for finding the forum. 
My advice is:
+ Read as much of the forum as you can - and related blogs, you will retire wealthy.
+ Get your money working for you and making more money - its not rocket science, but there is plenty of complex and confusing information out there to cause fear, uncertainty and doubt to keep peoples decision making suppressed - hence they hand their money over to "FINANCIAL EXPERTS"
+ Avoid a financial planner that works of commissions - they get kick backs from mutual funds, don't always act on your best interest (they get paid for selling stuff), read up on compound interest - and how that negatively works against you in the form of fees
+ Things dont need to be complicated. Complicated things are usually there to act as smoke and mirrors in order to take your money 
+ I'll fast track you to investment vehicles that I think are the backbone of becoming wealthy: 

You can do real estate or have investment accounts or both:

Regarding investment accounts:
+ First use registered investment accounts TFSA + RRSP.
+ Then non registered accounts

+ Regarding investing in the above accounts:
Low cost index funds and ETFS are basically a basket of stocks representing each company publicly traded in USA or Canada. Your wealth grows as the economy grows - no single stock can fail as you own a bit of everything.
Dividends and Dividend Reinvestment plans are amazing

+ Regarding Real estate - is solid if you like something physical that you can touch.

I don't have a massive net worth yet - but you can track mine in the money diaries - been doing it since 2009. I show you every month every investment I've made since 2009. It includes periods of us getting engaged, getting married, buying our first home, having 2 kids etc... Similar income and we go on 3 international vacations per year.

P.s. advice here is infinite and no limit, don't be afraid to ask!


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## Underworld (Aug 26, 2009)

And not to make assumptions the 500k cash is sitting in a personal account not a corporate account? I.e. its been fully taxed?


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## m3s (Apr 3, 2010)

Mirage said:


> after a first conversation with my bank manager (HSBC Premier), they recommended something like following to diversify the investments:
> 
> - $100k to max out both TFSAs and use them to invest in fairly aggressive mutual funds





vi123 said:


> Rule #1
> Don't buy anything that the bank is trying to sell you.


Rather than pad the glorified mutual funds salesperson's commission and the big bank's profits.. just buy some stocks in the big banks instead..

Don't buy a house because the "bank manager" says to either.. so they can rent you $500k in the form of a mortgage? Buy a house if _you_ want to own a house..

Good luck


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## PrairieGal (Apr 2, 2011)

An easy way to get started investing in index funds is the Tangerine Mutual Funds. I would recommend them for you and your wife's TFSAs, at least until you get more knowledgeable about ETF's and such. You can always move the money later, if you wish. The Couch Potato guy wrote a white paper about it. http://canadiancouchpotato.com/2013/09/12/the-one-fund-solution/

Check with the CRA to determine your TFSA limit; you definitely don't want to over-contribute.


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## Mirage (Jan 1, 2016)

Underworld said:


> And not to make assumptions the 500k cash is sitting in a personal account not a corporate account? I.e. its been fully taxed?


Correct, all our accounts are personal accounts.


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## Mirage (Jan 1, 2016)

Underworld said:


> Firstly, congratulations for finding the forum.
> My advice is:
> + Read as much of the forum as you can - and related blogs, you will retire wealthy.
> + Get your money working for you and making more money - its not rocket science, but there is plenty of complex and confusing information out there to cause fear, uncertainty and doubt to keep peoples decision making suppressed - hence they hand their money over to "FINANCIAL EXPERTS"
> ...


This is amazing advice, I cannot thank you (and the other members) enough.

A question that comes up right away is: if I open a TFSA and RRSP with my bank, can I purchase any ETFs I please in those accounts?

Mirage


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## Mirage (Jan 1, 2016)

m3s said:


> Rather than pad the glorified mutual funds salesperson's commission and the big bank's profits.. just buy some stocks in the big banks instead..
> 
> Don't buy a house because the "bank manager" says to either.. so they can rent you $500k in the form of a mortgage? Buy a house if _you_ want to own a house..
> 
> Good luck


Understood, this makes perfect sense. To be perfectly honest I am not hell bent on buying a house, although sometimes I feel like shelling close to $3k per month in rent is a waste, what do you think?


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## Just a Guy (Mar 27, 2012)

Mirage said:


> This is amazing advice, I cannot thank you (and the other members) enough.
> 
> A question that comes up right away is: if I open a TFSA and RRSP with my bank, can I purchase any ETFs I please in those accounts?
> 
> Mirage


You need to set up a "self directed" account for each, otherwise they put restrictions on what you can buy.


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## Just a Guy (Mar 27, 2012)

Mirage said:


> Understood, this makes perfect sense. To be perfectly honest I am not hell bent on buying a house, although sometimes I feel like shelling close to $3k per month in rent is a waste, what do you think?


There are advantages and disadvantages to either. When you actually run the numbers though, owing a house doesn't usually "make" you money, usually it's more of a "lost less" money than renting, however, you also can't move as easily, you feel compelled to upgrade, and you "feel" the losses more when faced with selling in a down market.

There is nothing wrong with renting, in fact, if you bank the difference between what you'd pay for a mortgage, renos, taxes, insurance, etc. And invested it, you could potentially come out ahead (depending on how your investments go of course).


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## Moneytoo (Mar 26, 2014)

Give this blog a try: http://www.greaterfool.ca/2015/12/29/big-things/


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## GreatLaker (Mar 23, 2014)

Mirage said:


> A question that comes up right away is: if I open a TFSA and RRSP with my bank, can I purchase any ETFs I please in those accounts?


You can open bank mutual fund accounts in various types (cash, TFSA, RRSP, RESP), but they typically will be restricted to the bank's own products, that are mostly high-cost, actively managed funds. TD offers eFund accounts, low cost index mutual funds that can only be purchased online, not through branches.
https://www.tdcanadatrust.com/produ...funds/td-eseries-funds.jsp#what-does-td-offer

To get access to a wide variety of mutual funds, ETFs, stocks and bonds you will need to open an online brokerage account. See the following link for a ranking by Globe and Mail. 
http://www.theglobeandmail.com/glob...annual-online-broker-ranking/article27571960/


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## 0xCC (Jan 5, 2012)

Look at that Globe and Mail link posted above by GreatLaker for a Discount Brokerage comparison. Your bank, HSBC, does not seem to rank well there. It will be a little bit of a hassle but you will probably want to look at investment accounts from other banks.

You will probably want to just start off with a couch potato type of investing and you could end up just sticking with that if you don't have a lot of time to manage your investments (and I would expect that from your salary level, your wife's studies and a 7 year old child there isn't a lot of free time in your schedule).


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## My Own Advisor (Sep 24, 2012)

Congrats Mirage on a great savings rate and well paying job. Those two factors will work in your favour for sure!!

My response will be rather simple, but I think worthy:

1. Take a year to dedicate yourself to determining your financial plan. What are your savings goals? What are you investing goals? I'm a believer that a plan needs to come before products. 
2. Take the year to read a number of quality books. Here is a short-list of recent favourites of mine:
http://www.myownadvisor.ca/reader-questions-essential-saving-and-investing-advice/

http://www.myownadvisor.ca/reader-question-just-starting-help-needed/

3. Open your online brokerage account(s) and start executing on your plan, including owning the financial products you need to meet your plans' objectives.

I think, although I don't know for sure, what you'll find is:
-you'll want to keep a modest emergency fund (in cash)
-you'll want to max out your TFSA(s) (for you, for your wife)
-you'll want to contribute to your son's RESP
-you'll end up contributing to your RRSP, to decrease your taxable income

Those priorities could trump your real estate needs, and nothing wrong with that.

Happy capitalism in 2016


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## Mirage (Jan 1, 2016)

Thank you once again to everyone suggesting excellent strategies.

I agree wholeheartedly that a plan should come before products, so I will certainly read up some of the materials you recommended during the year, but I am afraid not at a very fast pace, as 0xCC said very correctly I don't have lots of spare time.

Having said that I would like to start somewhere soon enough, just to avoid sitting on the cash like I have done over the past decade... I will work with the basics first, which possibly means talking to a tax advisor to know what to do right away, before filing the 2015 taxes.

Mirage


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> ... Yes, being a landlord is work, but it's a lot less work and hassle than people make it out to be...and it's a lot less work for the money compared to most jobs...yet people would rather the stress and hassles of a job.


Where one knows that one is doing ... probably. 

In the meantime, the OP is "clueless" yet has a bank manager suggest "$250k as downpayment ... for a ~$500k rental property". I'm pretty sure I recall your other posts saying "one needs to know what you are doing in RE" so I'm not sure why suggestions that jumping into a rental property should wait until one has learned what one is doing is apparently not a good idea.


In case I wasn't clear ... it is the a combination of the source of the advice and what seems to be a clear lack of knowledge ... not the asset that is the issue IMO.


Cheers


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## Eclectic12 (Oct 20, 2010)

Underworld said:


> ... Regarding investment accounts:
> + First use registered investment accounts TFSA + RRSP.
> + Then non registered accounts ...


I would add to this that for the taxable account, it is a good idea to use the time that the registered accounts are used to learn about the different tax treatments for the different investments.

Jumping into REITs without realising the cash paid is from a mix of income (which have a mix of tax treatments) without having a bookkeeping system in place to capture the needed info caused a *lot* of extra work. Once it was understood so that the yearly and semi-annual steps as well as the bookkeeping was adjusted - it is tedious but simple.


Cheers


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> You need to set up a "self directed" account for each, otherwise they put restrictions on what you can buy.


YMMV ... I setup a cash TFSA which when the company later added MFs, it now allows both cash and MFs.


With such a large sum available, setting up the accounts should mean one qualifies for the cheaper commissions so self-directed brokerage accounts at the same financial institution is likely the best way to go.


Cheers


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## Eclectic12 (Oct 20, 2010)

My Own Advisor said:


> ... 1. Take a year to dedicate yourself to determining your financial plan. What are your savings goals? What are you investing goals? I'm a believer that a plan needs to come before products.


Good advice ... though the time frame IMO should be more in align with how quickly one learns instead of a set period.




My Own Advisor said:


> ... 2. Take the year to read a number of quality books. Here is a short-list of recent favourites of mine ...


Also good advice.

There is also the sticky in the CMF Investing section "Eight with weight: A reading list for new investors".
Or by searching CMF, there have been several threads over the years of suggested books.

When the OP is getting close to investing in a taxable account, I'd recommend borrowing a good tax book (usually has a chapter on investing) or an investing book (usually has a chapter or two on taxes) from the library. This leaves more money for investing. :biggrin:

There's also the sticky in the CMF Taxation section ... "How Investment Taxes Work" (though it tends to be less complete than the types of books suggested).


Cheers


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