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New Investors: The 1 Rule You Need to Follow

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It’s a fairly simple rule and it goes like this: 50/30/20. And frankly, it has nothing to do with investing. At first.

This method is a simple budgeting tool. When used appropriately, you can turn any portfolio or savings into a mass of income! And of course,  you must stay on top of all your payments. So let’s dig in.

50/30/20

No one can say that they won’t spend a dime on themselves. Even if you seriously need to buckle down and save to pay down debt, you cannot allow yourself to think you won’t spend on yourself. It isn’t realistic. And that’s where this rule comes into play.

The 50/30/20 rule allows you to pay down your bills and debt, put savings aside, and of course spend a bit on yourself. The rule breaks down like this:

  • Of your income, 50% should go toward your needs. These would include housing costs, food, child care and the like.
  • Of your income, 30% should go toward things you want. This would include eating out, buying clothes, travel (in post-pandemic Canada) etc.
  • Finally, 20% of your income should go towards your financial goals. This would of course include debt reduction, but then you can allocate pretty much the rest towards savings and investments.

Savings + investments = goals!

I say savings and investments because the two should go together. In Canada we have access to the Tax-Free Savings Account (TFSA). This method allows you to put your cash aside, tax free, and save it for when you’re ready to invest. If you want to leave it there, fine. But by investing you can take out your cash at any time and not pay a penny in taxes if done correctly.

And even if you think you don’t have the money to invest, it’s simply not true! Let’s say you put this 50/30/20 method into practice in the next year. After taxes, we’ll say you made about $40,000. That would mean $20,000 went towards your necessities, and $12,000 went toward your wants. That leaves $8,000 for your financial goals. Let’s just say you have debt and used half of that number to pay it down. That’s still $4,000 you can use to invest and save!

Turn money into more money fast!

It’s not a trick. If you’re a new investor, you’ll want to create a diverse portfolio of strong, stable companies that you can hold onto and reinvest in for decades. That should include a number of different stocks, bonds, ETFs and the like. I would talk to your financial advisor who can help you set up some options. If you have a bank account, you should be able to do this for free!

But if you want something to get you start, I would look into dividend stocks. These stocks provide funds every quarter, and sometimes every month. Then you want a company you can buy and forget about. That’s why I would consider the Big Six Banks. These companies have been on the rise for decades, paying out dividends for over a century in most cases! And if there’s one I would consider it’s Toronto-Dominion Bank (TSX:TD)(NYSE:TD).

TD Bank is on the growth path thanks to its expansion into the United States, growth in its online presence, expansion into the wealth and commercial management sector, and providing clients with numerous methods of loan repayments. Shares are up 48% in the last year, surpassing pre-pandemic levels. Meanwhile, it offers a 3.81% dividend yield you can bring in each quarter. A $4,000 investment would get you $154 per year in income, even if shares remained stagnant!

Bottom line

You can reach your goals, pay down debt, and still have cash for you. You just have to be organized and stick to your budget. Don’t be unrealistic, and you can still see your savings grow. Talking to your advisor and finding stocks like TD Bank is a great place to start your investment journey. So good luck!

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe owns shares of TORONTO-DOMINION BANK.

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