How to start investing: Essential steps every beginner should know

Why investing matters, now more than ever

Want to set yourself up for financial success? Here’s a suggestion: start investing. Though always a good idea, today’s financial environment means investing is more relevant than ever before. That’s because inflation erodes the value of your money. In the face of that challenge, investing can protect and grow your wealth over time.

What exactly is investing? It’s when you use your money to earn income or profit, typically through purchasing investment products, or assets like real estate. Sure, savings are important too. But investing can generate returns higher than the rate of inflation. Interest earned with a savings account – often lower than the rate of inflation - can’t compete with those returns. And if you’re not keeping up with inflation, your money will stagnate, undermining your long-term financial stability.

If you feel you don’t have enough funds to start investing, think again. Even a small amount can add up thanks to compounding, whereby your returns on investment earn returns of their own. Returns beget returns, that’s the power of compound interest.

Let’s look at an example: Mike invested $150 every month for 20 years at 5% annual interest. In 20 years’ time he’ll have earned over $60,000 from the monthly contributions, around $24,000 of which as earned interest. Keep in mind that the longer your money is invested, the more compound earnings you have the potential to make.

And don’t let anyone tell you that investing requires luck or timing the market. What you need is to be consistent in your approach and diligent (and insightful) in your investment strategy. Getting some support doesn’t hurt either. Online trading platforms like BMO InvestorLine adviceDirect and advice from top research providers can help in your investment journey. More on that later. But, in the meantime, here are some things to think about as you start investing and building your unique investing plan.

Before You Invest: Determining risk tolerance & setting a time horizon

Before you even contemplate investing, make sure you do some housekeeping. Namely, pay down your high-interest debt such as credit cards. Very few investments will consistently outperform the 20% or so 

in interest that you’re likely forking over to a credit card company to service your debt. So do everything you can to pay that off before you start putting money aside to invest.

Then there’s the matter of an emergency fund. You need one. In polite terms, poop happens. Layoffs, natural disasters, illness — let us count the ways in which your life can be turned upside down. Any financial advisor will tell you that you should set aside between three to six months of total living expenses as a safety net to avoid liquidating investments in times of crisis.

Assess risk tolerance

With housekeeping out of the way, we can move forward with investing. Being an investor can be a risky business. You need to ask yourself how much risk you’re comfortable taking on. Of course, big risks can come with big rewards. But think about how you would feel if your portfolio suddenly dropped by 20 per cent. If that hypothetical causes you significant stress, you may want to opt for more predictable investment options.

Then again, if you don’t need your money in the near future and have time to recover from any losses, you may opt to take on more risky investments that will pay off in the long-term. Bottom line: be honest about how much risk you’re comfortable taking on and what kind of performance you’re hoping to see from your investments.

Set a time horizon

When do you plan on cashing in your investments? A year from now? A decade? The timing of your financial goals is just as important as your risk tolerance when it comes to shaping your investment decisions.

If you’re saving for a short-term goal (think five years away or less), your portfolio may not have time to recover from potential losses. That means even normal market fluctuations could be a big blow to your investments. You may want to consider more stable options, such as fixed income investments like bonds and GICs, even if you’re comfortable with more volatile ones.

On the other hand, when you have a longer window to invest, you have more time to bounce back from any dips in the market. That gives you a little more wiggle room to try out some riskier investment options, like the stock market.

Of course, you still need to determine how much to allocate toward investing. It’s hard to know the answer without having a clear picture of your money. A budgeting tool can help you track your income, expenses and savings. That exercise will give you a good understanding of your finances and how much you’re comfortable with – and capable of - investing. Don’t forget to approach investing with a long-term mindset. You should only be investing funds that you know you won’t need in the near future.

Setting clear investment goals

You’ve paid off your high-debt credit cards, established your risk tolerance and time horizon and made sure your budget allows for investing. The question you must now ask yourself is why you’re investing. What are the goals you wish to achieve by investing your money? Answering your “why” is essential to establishing an investment strategy, your choice of assets and other details of your investment.

First off, determine if your investment goal is long-term, medium-term, or short-term. Typically, long-term goals take over five years (often 10) to reach. Retirement planning comes to mind. Medium-term goals, such as saving for a down payment or a car, take one to five years to reach. Short-term goals, like saving for a vacation or an education fund, can take a year or two.

And here’s why goal timelines matter: If your objective is retirement, that long-term goal allows you to pursue more growth-oriented strategies which are focused on investments that are expected to grow faster than the broader market, such as stocks. Alternatively, if you’re saving for a short-term goal, you wouldn’t want to invest in riskier stocks. You’d probably look at a low-risk investment portfolio.

Be sure to be specific about your goals and determine the estimated cost and timeline of each. Ensure you can measure them, that they’re actionable. Then hold yourself accountable to them. Remember: not every goal needs to fit within one investment account. In fact, separate accounts make more sense when trying to achieve different objectives. A Tax-Free Savings Account (TFSA), for example, seems an ideal account for general savings, while a Registered Retirement Savings Plan (RRSP) makes more sense when saving specifically for retirement.

Understanding the types of investment accounts

Let’s take a deeper look at these two registered investment accounts before we focus on non-registered investment account types in Canada. Depending on your goals, one or more of these key accounts can be a good fit for your investment portfolio.

TFSA

A TFSA a registered savings account in Canada in which the income earned on investments is tax-free. Withdrawals are tax-free too. Any Canadian aged 18 can hold a wide variety of qualified investments in a TFSA, including cash, stocks, bonds, mutual funds and guaranteed investment certificates (GICs). The government determines the contribution limit each year (it was $7000 in 2025). But if you don't contribute up to the limit one year, the allowable amount is carried forward and added to your contribution room for future years.

Its flexibility and tax implications make the TFSA an ideal investment for both short- or long-term goals. Want to save up for next year’s vacation? Or finally buy yourself a new car? The TFSA allows you to build a nest egg for both expected and unexpected expenses.

RRSP

Another registered investment account, the RRSP – Registered Retirement Savings Plan – was designed to provide tax breaks for those looking to build long-term retirement savings. As the name implies, the money you put into your RRSP is not taxed and you can deduct contributions from your taxes at year-end. Essentially your money grows tax-free until it’s time to retire. Keep in mind the money is tax-deferred, not tax-free. Which means you’ll have to pay taxes when you withdraw your money. But, by that time you’ll hopefully be retired with a lower tax rate.

You can contribute up to 18% of your earned income from the previous year into an RRSP. The CRA sets an annual limit for contributions (in 2025 it was $32,490) but if you didn't use all your RRSP contribution room one year, it carries forward and can be added to the next year's limit. Be careful not to over-contribute, though, as doing so can trigger a penalty.

And if you think the RRSP is only helpful for retirement goals, think again. It can also help with homeownership and education goals. The Home Buyers’ Plan (HBP) allows first-time homebuyers to borrow up to $60,000 of their RRSP holdings toward purchasing a home without any tax implications. Funds must be withdrawn within 30 days of living in the home and repaid over a fifteen-year period.

The Lifelong Learning Plan (LLP) also allows temporary withdrawals from RRSPs but only to pay for educational expenses for you, your spouse or common-law partner (excluding children). Up to $10,000 can be withdrawn each year to a maximum of $20,000. As long as the funds are repaid to your RRSP within ten years, the withdrawal is not taxable.

Non-Registered Accounts

A non-registered account doesn’t have a contribution limit – you can basically invest as much as you like - but it doesn’t have tax advantages either on the investment income. The most popular types of non-registered accounts are cash, margin and high-interest savings accounts (HISAs). If you’re an advanced investor or have maxed out your registered accounts, a non-registered account is a good choice, especially as it allows for flexibility and fewer restrictions.

While the interest, dividends and capital gains earned in non-registered accounts are taxable, they’re not taxed in the same way. Interest earned on investments, like GICs, is fully taxable at your marginal tax rate. Meanwhile, dividends from stocks are taxable. Except they can be eligible for a dividend tax credit, reducing your taxes payable. As for capital gains, they’re taxable at a 50% inclusion rate (only 50% of the gain is added to your taxable income). For example, say you bought stocks for $5,000 and sold them for $10,000, your capital gain is $5,000, and you would only pay tax on $2,500.