Saving Or Investing?
We all know that saving money is important, but should that money be put in a savings account or should it be invested? The answer isn't as simple as you might imagine. There are benefits to both, and the answer depends solely on what you need.
Saving
Savings accounts in Canada these days pay minimal interest. In fact, most major banks don't offer savings accounts that pay above inflation. This means that by the time you take your money out, your money will be worth less than when you put it in, regardless of the dollar figure. Now you might be thinking, well what's the point of a savings account then? Well, they're good for a couple of things:
- They give you immediate access to funds.
- They pay interest, and regardless of how little it is, it's still better than 0%.
- They prevent leakage of funds. Something in our psychology likes to organise, and that stops you from taking money from your savings to buy something you don't need.
The first point is the most important. Freedom to access your funds on your terms is extremely important. That's why a savings account should always be a first priority, but not your only priority, that's where investing comes in.
Investing
Investing is putting your money on the success of businesses. Sort of like backing an investment your friend pitches you, but with a wider range of options that have a proven track record. Most well managed investments earn between 5%-10% on a yearly basis, depending on your risk tolerance, after management fees. However if you're comfortable with learning a little bit more you can see higher returns by making independent investment choices or just following an index like the Dow Jones. Now you might be thinking, well an investment sounds a whole lot better than a savings account! But your investments don't give you immediate access to funds, and they fluctuate, changing in value dramatically every day. They are good for a couple of things:
- They are excellent for saving for a specific goal, such as your child's education.
- They give you good returns on your investment over a long time.
- They can provide you with additional income if you need it through dividends.
The first point again is most important. Investments help you stay on track for a specific purpose. If you have any long term goals you want to save for, you should definitely be investing your money to reach that goal.
Should I Save Or Invest?
You should do both, depending on your priorities. Everyone needs an emergency fund, so you should have a savings account that you can access at any time to help you pay for any unexpected expenses, and you should always add to it. How much you add to it depends on how comfortable you are with the amount you have saved so far. At the same time, don't neglect to invest for any life goals, such as your child's education, or a down payment or even a wedding. Keep your priorities and stick with a plan and you'll find that these great tools can help you achieve your dreams.
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