Are You Broke? Here's How to Start Investing – The Motley Fool Canada

It’s not easy being broke. Long-term financial planning becomes difficult. Saving for retirement is hard when you have monthly debt payments to make. But it’s never too early to start investing, even if your financial life is grim.

The biggest thing to know is that you don’t need $10,000 to start investing. You don’t even need $1,000. Stashing away even $20 per week can compound into incredible sums over time. All you need to do is get started.

Pick an account

If you’re broke but still want to invest, put your money into an RRSP — that stands for a Registered Retirement Savings Plan. These are available to any employed or self-employed person in Canada.

There are several reasons why you want to stick with an RRSP versus a traditional investment account or even another retirement vehicle like a TFSA.

The biggest advantage deals with taxes. When you put $100 into your RRSP, your taxable income is reduced by $100. If you pay 20% of your income to the government, you’ll be shaving $20 off your annual tax bill for every $100 that you contribute.

This type of tax advantage is considered pre-tax — that is, you’re reducing your pre-tax income, which effectively lowers your eventual tax hit. Traditional investing accounts have no such advantages.

Other tax-advantaged vehicles like TFSAs, for example, are considered post-tax. Contributions don’t lower your current taxable income, meaning you’ll pay the same amount in taxes this year. In return, you pay no taxes upon withdrawal.

If you’re broke, go with an RRSP. Getting the tax savings today means you can afford to contribute more. The long-term tax advantages of a TFSA are lucrative, but they don’t improve your short-term finances.

Free up some money

This is a piece of advice that you’ve heard over and over: build and maintain an accurate budget. Knowing where your money is coming from and where it’s going is the first step towards financial freedom. If you don’t get your income and spending aligned, your investment efforts will be for naught.

This exercise isn’t as daunting as it may seem. You don’t need to be a mathematical wizard. The most important thing is to have a simple awareness of your money flows. Only then can you start investing.

Many budgeters realize that a handful of spending categories are responsible for the bulk of their expenses. Sometimes it’s rent or car payments. Other times it’s entertainment or debt payments. Without targeting your major spending buckets, you’ll struggle to free up enough capital to build a strong investment account.

Open an RRSP. Build a budget. Identify where you can squeeze out some extra savings. Then move to the final step: automating your contributions.

Start investing with this trick

Automated contributions are the greatest trick in investing history. Here’s how they work.

Most RRSP accounts will allow you to establish recurring deposits. For example, you can have $20 per week deposited into your account. You can have it taken out of your paycheque or from a savings account. In either case, automated contributions ensure that you’re regularly stashing away more money, no matter how small the sum is.

After building your budget, you should have a clear sense of how much extra money you can direct into your RRSP. It doesn’t matter if the amount is $20 or $2,000. Any dollar figure is enough to start investing.

As your financial condition improves, you can start to raise your regular contribution amount. Maybe you start putting away $50 every two weeks, or $250 every month. The important part is simply to have these recurring deposits in place.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.