Mom reading a book about risk tolerance and tax

Moms Should Know About Risk Tolerance and Tax When Investing

Moms want to make sure their family’s financial health today and in the future are well taken care of. This means having a priorities-based financial plan and understanding some of the basic elements of smart investing. 

Knowing your own risk tolerance, the impact taxes can have on your portfolio, and developing a regular saving discipline are key elements to achieve long term financial priorities. 

These were some of the topics WealthyPlanet explored in a survey we conducted with over 250 Ontario Moms from the Movies for Mommies social community. These Moms were mostly between the ages 31-40 and have one or more kids. 

We asked financial planning expert and author, Michael Hlinka, CFA, to look at our survey results and provide some context and tips for Moms on proper financial planning related to investments. 

Tip 1 ‒ Understand your risk tolerance

We asked the Moms in our survey if they could describe their personal risk tolerance regarding their investment portfolio. Can you describe the risk tolerance of your investment portfolio pie chart: 49% yes, 51% no

Just over half or 51% said they were unable to do this. Risk tolerance refers to the degree of uncertainty you are willing to take on to achieve potentially greater returns. Usually risk tolerance is described as your propensity for low, medium, or high levels of risk.  It is determined by your investment goals and experience, how much you have to invest over what time period, your overall net worth, and personal or emotional factors. If you have a longer investment time horizon or consider yourself wealthy, then you might be able to tolerate a higher degree of risk found in growth stocks instead of less risky value or income investments. 

According to financial planning expert, Michael Hlinka “There is a clear relationship between risk and return:  The higher the risk, the higher the expected return.  However, what you should be thinking about is what return you need to achieve your goals.  Then you can calibrate the risk accordingly.”

Tip 2 - Make sure your investments are tax efficient

Tax is not one of those exciting subjects people love to talk about.  But tax is important to consider as part of a proper financial plan for the huge impact it can have on longer term priorities such as saving for retirement. By optimizing tax, more money can go towards your priorities. 

Do you know if your current investments are tax-efficient pie chart: 48% yes, 52% no

Just over half or 52% of Moms in our survey indicated they don’t know if their current investments are tax efficient. 

Would you like to know more about making your investments tax-efficient pie chart: 51% yes, 49% no

Fortunately,  51% of Moms indicated they wanted to learn more about optimizing their investments for tax. 

According to Michael Hlinka: “In North America, there are different tax treatments depending on whether your returns are in the form of interest income, dividends or realized capital gains.  If you’re saving in a tax-protected account, it doesn’t matter how your returns are generated.  If your account is not tax-protected, then the source of the returns matters profoundly.”

Tip 3 - The discipline of saving each month can make you a millionaire 

Are Moms big spenders or big savers?  We asked Moms if they are able to put money away into savings every month and the overwhelming majority, or 83%, said yes. Retail therapy shopping sprees may be rare for this group of smart moms. 

Are you able to put some money into savings each month pie chart: 83% yes, 17% noWhatever method works for you- automatic deductions or paying yourself for savings goals first before paying bills− the accumulation of just the principal plus interest can make you a millionaire over many years. By transferring just $200 bi-weekly into an investment account averaging a 7% rate of return, you would end up with a million dollars at retirement age if you started at age 25. 

Michael Hlinka says “We all know the story of the tortoise and the hare.  Slow and steady wins the race!”

 

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