Saving and investing are both ways of setting money aside for the future. Both involve growing your money. And both should involve goals that make sense for your personal situation. But there are a few key differences to keep in mind that can change whether you will meet your goals by saving or by investing.
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Some accounts such as the Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP), and Registered Disability Savings Plan (RDSP) can hold savings deposits and investments. Speak to your financial advisor about the strategy that’s right for you.
Saving helps you reach short-term goals
Saving involves putting aside some of your money to use in the future, often for a short-term goal. It could be as modest as saving up for a new phone or concert tickets. Or it could be building an emergency fund to help you through an uncertain time in the future.
Usually, savings goals involve a specific amount of money that you know you need to save. For example, if you want to have an emergency fund worth three months of living expenses, you’ll be able to calculate that based on your current monthly spending.
You can set aside money for savings each month or each week, depending on your cash flow. Try to make it an automatic habit by setting up direct transfers from one bank account to another.
Reasons to put aside savings:
- Meet your short-term goals
- Build an emergency fund
- Start a habit of putting money aside
Savings accounts keep your money accessible while it grows
Your savings should be kept somewhere you can access quickly when you need it, but still in a secure place. For example, a savings account or a TFSA.
These accounts will also allow you to grow your money through compound interest. When you sign up for a savings account be sure to check the interest rates as well as the fees. Some savings accounts will yield higher interest rates if you keep a higher balance.
The downside of savings accounts
Savings accounts tend to offer interest rates that are lower than the rate of inflation. This means your money could have less purchasing power in the long run.
If you are paying off high interest debts such as credit cards, it may be better to pay these down first before focusing on large savings goals or investing. The interest accumulated on these debts will grow faster than the interest on your savings.
Investing has potential for higher returns but also more risks
Investing usually means buying assets or securities which hopefully, produces a return. In the long-term, investing typically provides higher returns than savings accounts.
Investments, like stocks and mutual funds, have historically provided returns higher than the rate of inflation over the long run. This makes investing ideal for long-term goals such as retirement, a home purchase or future income. If you’ve already established a savings habit and are comfortable putting aside money for future goals, investing may be right for you.
The potential for higher returns means that investing can help you accumulate wealth faster. However, investing also involves more risk than saving. When you invest, the value of your investments can fluctuate up and down, especially in the short-term. Its value can depend on many different factors, such as:
- the type of investment
- the performance of companies or a specific industry
- the economy as a whole
Generally, the higher the potential return of an investment, the higher the risk. There is no guarantee that you will receive a higher return by accepting more risk and you may lose some or all your money.
Knowing your risk tolerance level is important because there is no guarantee of a certain return.
Investing can involve more choices
There are many different ways to invest. Some investment accounts are designed for specific types of goals, such as a Registered Retirement Savings Plan (RRSP). You can also invest in different products outright, such as stocks, Exchange Traded Funds (ETFs), or mutual funds. Keeping a diverse portfolio is one way to manage risk.
You can work with a financial advisor to help manage your investments based on your goals or choose an online or robo-advisor. You can also decide if self-directed investing is right for you.
Whether you are a new or experienced investor, make sure you track your progress on a regular basis. Having a clear financial plan will help you guide your choices.
Investing may be right for you if:
- You know your risk tolerance
- You are already in the habit of putting money aside
- You’ve paid off high interest debt
- You have long term goals to invest in
