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Finance 101

Your personal finance journey. TFSA, RRSP and bank accounts

November 14, 2014

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Your personal finance journey. TFSA, RRSP and bank accounts

Finance 101

When you’re in this business, you spend a lot of time talking to people about their finances. On the clock, off the clock, at the supermarket, at the daycare… it just comes with the territory. As an educator, I always strive to take big, scary financial terminology and simplify them in a way that most people can understand.

One of the most common stumbling blocks for new investors is understanding the difference between account types and actual investments. For this, I’ve come up with a perfect analogy:

Let’s think for a moment about going on a trip. A trip consists of a journey and a destination. We take the journey with a transportation vehicle, and usually, we take some personal possessions with us, so our stay at the destination is a pleasant one.

We aren’t sure what vehicle we are going to choose for the journey, but we know that we have a lot of options. We can take a plane, a train, a car, a boat, and so on.

Depending on where we are going, some vehicles do not make sense. If we are traveling inland from Vancouver to Toronto, it doesn’t make sense to take a boat. Likewise, if we are traveling from Toronto to London, UK, it doesn’t make sense to take a car.

This is similar to your goal-focused financial plan. Your journey is the time you have to reach the goal. Your destination is the goal itself, be it retirement, financial independence or a big trip.

Now, we need to pick our vehicle. RRSP’s and TFSA’s are vehicles. They are a mode of transporting our wealth to the future and each of the accounts has characteristics that make them different. Just like traveling by plane is much different than traveling by train, the suitcase you take is the same.

Such is the case with TFSA’s and RRSP’s. As vehicles, they behave differently through the tax and legal system and they have different characteristics. However, they can carry the same type of possessions. Possessions such as Exchange Traded Funds (ETF’s), Mutual Fund, GIC, etc.

If it’s hard to remember which category an account belongs to, remember this: if the name has the words plan or account in it, (Registered Retirement Savings Plan or Tax-Free Savings Account, Registered Education Savings Plan, Bank Account, etc.) the chances are, this is a vehicle.

If the name has the word fund in it (like Exchange Traded Fund or Mutual Fund), then it is likely that it is a possession and something that you put inside the plan or account.

Much like planning a trip, it’s always best to first plan where you want to go, and how you will get there.

Once you’ve chosen a financial goal and an investment vehicle, then you (or your advisor) are better equipped to select investments that align with that goal.

Photo source: martinteschner

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