First, it is a very wise decision either to put money into savings account or to invest. Which one should you do? The answer depends on your financial goal, short or long-term plans, retirement goals etc.
Although the word Investment may sound scary, it is not. Investments is for everybody, regardless of you financial situations.
Savings Account:
Setting aside your money or and storing for a future need is called savings. Banks offer savings accounts with fixed or tiered interest rates, relatively very low, starting from 0.005% to 1.5%. Savings account is more like low-risk place to keep your money safe but not expecting large growth.
Pros:
- You do not lose your money.
- Easy to setup.
- Good for short-term savings.
Cons
- Since the return is low, your money won’t grow that 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 are saving $100.00 a month starting today, with initial deposit of $0.00, at an annualized interest rate of 0.05% will be worth $1200.32 after 1 years when compounded yearly.
In short, putting $1200 for a whole year in a savings account will generate $0.32 in a year, however the growth is subject to regular income tax.
Even though there is a growth of $0.32 a year, factoring the inflation of 3.4%, your real rate of return is negative. To keep up with the inflation, your saving account must give you higher return than 3.4%.
Investing Accounts:
Investing account is also involves storing your money for future needs, but instead of relying on low interest rate, your money is invested in various assets (ETF, Stocks, Bonds, Mutual Funds, Segregated funds etc) for higher growth with 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 TFSA.
Cons
- Returns are not always guaranteed as they depend on market
- All investments have a certain level of risk.
Example: If you are investing $100.00 a month starting, today on a TFSA, with initial deposit of $0.00, at an annualized rate of return of 6% will be worth $1238.68 after 1 years when compounded yearly.
In short, putting $1200 for a whole year in a TFSA account will generate $38.68 in a year, and earnings is tax-free.
Even with inflation of 3.4%, your real rate of return is 2.6%, which is significantly higher than savings account.
Conclusion
In conclusion, consistent investments over a number of years can be an effective strategy to accumulate wealth. If you have short-term goals such as savings for a vacation, putting money into Savings is ideal.
If you have long-term goals and have a long time horizon, such as retirement in the next 10-20 years, putting money into 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 today to discuss what is best for you.
