First, it is a very wise decision to either put money into a savings account or invest. Which one should you choose? The answer depends on your financial goals, whether they are short or long-term plans, retirement goals, etc.
Although the word “investment” may sound intimidating, it is not. Investments are for everybody, regardless of your financial situation.
Savings Account:
Setting aside your money and storing it for a future need is called saving. Banks offer savings accounts with fixed or tiered interest rates that are relatively low, starting from 0.005% to 1.5%. A savings account is a low-risk place to keep your money safe, but do not expect large growth.
Pros:
You do not lose your money.
Easy to set up.
Good for short-term savings.
Cons:
Since the return is low, your money won’t grow much.
Due to inflation, your real rate of return might be negative.
Do not expect large gains.
Interest on savings is subject to regular income tax.
Example: If you save $100 a month starting today with an initial deposit of $0 at an annual interest rate of 0.05%, it will be worth $1,200.32 after one year when compounded annually. In short, putting $1,200 in a savings account for a whole year will generate $0.32, subject to regular income tax. Factoring in inflation at 3.4%, your real rate of return is negative. To keep up with inflation, your savings account must give you a higher return than 3.4%.
Investing Accounts:
An investing account also involves storing your money for future needs, but instead of relying on a low interest rate, your money is invested in various assets (ETFs, Stocks, Bonds, Mutual Funds, Segregated funds, etc.) for higher growth with a higher rate of return.
Pros:
Investing products such as stocks can have much higher returns than savings accounts.
Usually best for long-term financial goals (5, 10, 15 or more years).
No taxes on some investment accounts such as a TFSA.
Cons:
Returns are not always guaranteed as they depend on the market.
All investments have a certain level of risk.
Example: If you invest $100 a month starting today in a TFSA with an initial deposit of $0 at an annual rate of return of 6%, it will be worth $1,238.68 after one year when compounded annually. In short, putting $1,200 in a TFSA for a whole year will generate $38.68, and the earnings are tax-free. Even with inflation at 3.4%, your real rate of return is 2.6%, significantly higher than a savings account.
Conclusion:
Consistent investments over several years can be an effective strategy to accumulate wealth. If you have short-term goals, such as saving for a vacation, putting money into a savings account is ideal. If you have long-term goals and a longer time horizon, such as retirement in the next 10-20 years, investing will generate more returns.
It’s up to you to decide whether saving or investing is the better choice to reach your financial goals.
Contact us today to discuss what is best for you.
