Written by William Granados
on 

Investments Basics

So upon graduation, me like any other student has come across the question, what now? Well if you’re lucky maybe you’ll have a job, and this will help you get started in the right direction.

Income

There’s a couple of ways to make money, but one of the most common include salaried jobs. There are a couple of ways that people in tech get compensated but most follows the pattern of: (Cash)

(Equity)

Most cash based compensation are straight foward, equity based compensation is a bit different.

If your company is public and is trading shares in the NASDAQ or TSX then you will likely get RSU. These usually consist of a grant date that locks the intial price of your stock, then a vesting period (usually 1 year).

If your company is pre-ipo you will likely get stock options and than you can exercise these options (i.e. purchase as set price below IPO price) once a company IPOs. These usually have a set 6 month period before you can decide to sell.

Deductions (i.e. Taxes)

The not so fun part of income taxes, these usually contain the federal and provincial portion of the your taxes, along with payments to cpp/ei. Canada has a tier based tax system that I will try to explain (image obtained from taxtips.ca). Here the terminology you need to know:

Other Income: This includes your cash based and equity based compensation.

Capital gains: These are taxes on when holding stock investments. An example: vested stocks that you didn’t sell that increased in price would be taxed under this column.

Dividends: This is passive income you receieve from something like bonds

Marginal Tax Rate: That highest tax bracket you’re in. I.e. if you earned $1000 more in your annual income, your highest tax bracket determines how much of that you’ll keep.

Average Tax Rate: The average of tax paid in all brackets, usually it’s something like 33% of your yearly income. This is useful for calculating your take home income after taxes.

Important chart

Debts / Student loans

Most students in ontario take out OSAP whias is split up in a federal and provincial portion of your loan. These interested on each portion is calculated as the prime rate (around 2.45% in 2021), along with a flat amount (0% for federal, 3% for provincial). In my experience the provincial part is pretty low, so I’d effectively be paying a 3% interest for my loan.

Tax advantaged accounts

Usually you’d be taxed captial gains on your investments, but these are special accounts provided by the government that help you dip your toes into investments.

RRSP

The maximum amount that you can deposit per year to this type of account is the minimum of 20% of your income or $29210 (source). Any money withdrawn cannot cannot increase your deposit limit (hence you lose the benefit of compound interest).

These deposit can be carried over to the next year. But the important these contributions can be used as a tax deduction. You can think of it as a hyperbolic time chamber where you would the taxes you would normally at a later date. Upon withdrawel any item you would withdraw is counted as other income (which you can refer to above).

Ideally if you’re working and in a higher tax bracket (i.e. 45% marginal tax bracket), if you were to be at a lower tax bracket later (i.e. retired), then you could withdraw from it and be in a lower marginal tax rate (i.e. 20% for up to 45k). So you ideally pay less taxes and can pay for retirement.

Some employers also offer employee matching up to a certain percent of your annual income (i.e. 3%). These are great because you can think of it as free money in the future!

Another advantage of your is you may be eligble for the HBP. This allows first time home buyers to withdraw up to 35k tax free from their RRSP that can be towards your home purchase. This you normally have to pay back in full after 10 years. but it’s pretty good since because you can your pretax money to work as an interest free loan.

TFSA

The maximum amount you can deposity per year is generally $6000, and this is accumlated from the year you turn 18 (sorry if you’re younger you can’t have one :( ). You never have to pay any forms of taxes on gains in these account (yay). If you withdraw money than your maximum deposit gets refreshed the following year.

These are really great because you don’t have to pay capital gains on any income, and you can freely withdraw money without it pushing you to a higher tax bracket.

Investment Options

There’s a distriction between passive and active investments strategies for these accounts.

Generally big banks like to actively invest in your accounts (i.e. mutual funds, hand picking stocks/bonds) and they charge alot, while other places invest in index funds (i.e. ETFS) that model the market.

A popular passive investment platform is the robo advisor WealthSimple because it’s hand free and you don’t have to pick investments yourself. If you want to actively invest you can try WealthSimple Trade.

Budgeting

The following is a spreadsheet I made with the help of some friends to make budgeting easier. Good luck!