What's the meaning of life? Happiness? Love? Saving versus investing? Okay, maybe saving money versus investing it might not be one of life’s "big" philosophical questions, but it's important enough to deserve some serious consideration. But first, let’s review the differences between investing and saving, just to be sure we’re on the same page, then we'll discuss a few other important considerations.
What’s the Difference Between Saving and Investing?
If you had a piggy bank when you were a child (and actually used it), you’re already familiar with the idea of saving! It’s all about putting money aside, usually into a savings account, bit by bit, adding an occasional lump sum if you suddenly come into some money, like a tax refund or an overtime paycheque.
Forget the piggy bank! Investing takes saving to the next level by putting your money into stocks, real estate property, or other investment vehicles. The idea is to not just save your money, but to grow your money by investing it in something that will increase in value over time.
So, think about saving as setting aside money for short-term goals, like a downpayment on a new car, the newest iPhone, or a vacation. On the other hand, think about investing as putting money aside for long-term goals, such as a home, your child’s education fund, or your own retirement.
A good rule of thumb is to save for items you want in 1-3 years and invest for things you'll want in at least five years or more.
The Key to Saving Money
Saving is all about putting money in a safe place that’s accessible when you need it, like a savings or chequeing account. While you may want to shop around before choosing a bank to open an account with—some offer financial incentives for starting an account or a free chequeing account, while others require you to maintain a minimum balance, otherwise you'll incur monthly/annual fees—you aren’t likely to find a significant difference in the interest rates different banks offer. (Ratehub's savings account comparison chart can give you a peek.) With a typical savings account, depending on your balance, you may only earn a few dollars per year, but that's okay because again, this account is for short-term goals anyway. The trade-off is that you can easily pull the money out when you need it.
The Key to Investing Money
Investing is a commitment because you're putting money away with the intention of not using it for a very long time. Investing involves buying an asset, whether it's a stock or something physical, like land, property or a painting, with the hope of it generating returns over time.
For example, you might invest $1,000 today in a particular stock or asset anticipating that it will be worth $2,500 ten years down the road. But keep in mind that investing only works to your advantage if you sell an asset at a higher price than what you paid for it; that’s where risk comes in.
Unlike saving, investing is a bit of a gamble, especially when it comes to short-term investments. Stocks and mutual funds can be volatile, rising and falling in value daily (and causing distress to those who watch their investments daily). This is why investing is recommended as a long-term strategy. Of course, there is always risk no matter what, whether your investment is in a piece of property or hockey memorabilia. So, be sure to speak with a financial expert before making any major investments.
2 Things to Consider Before Saving or Investing
Now that the difference between saving and investing is clear, you need to consider whether or not you're in debt and if you have an emergency fund. If you answer yes to either of these questions, you should not be saving or investing. Let's dig a little deeper.
Payoff Debt First
We've all heard the saying "pay yourself first" but if you owe money to creditors or lenders, saving or investing are probably not at the top of your priority list. Sadly, most people struggling financially are withdrawing money from their savings or investments just to make ends meet. However, this is the best strategy, as it can save you hundreds or even thousands of dollars in interest. Paying off the debt with the highest interest rate first (also known as the avalanche method of debt repayment) will save you the most in interest. But remember to continue to make the minimum payments on all your other debts.
Set Up an Emergency Fund
Paying down debt should always be your top priority, followed by setting up an emergency fund. While many people confuse savings with an emergency fund, they are very different. Savings are for the aforementioned short-term goals, like a vacation. An emergency fund, however, is not to be touched unless there is a true emergency—for example, a medical issue or a job loss. It's recommended that you save up at least 3 months' worth of your salary and put it into a separate savings account specifically to be used as an emergency fund. You should do this before you start building up your savings.
Get a plan to get out of debt
If the thought of saving or investing seems like an impossibility to you due to debt, our Debt Consolidation Program (DCP) might be able to help. A DCP is an “arrangement” where a credit counsellor works with your creditors to help you pay off your unsecured debt over time. They will negotiate with your creditors to either stop or significantly reduce the interest on your debt, you'll only need to worry about making one monthly payment, your counsellor will make sure that monthly payment works with your budget and monthly expenses (so you can still pay your rent and buy groceries), and you'll have a set completion date!
At Credit Canada, we think it’s important for everyone to be able to plan for their future, both short- and long-term. If a DCP sounds like it might be right for you, give us a call at 1.800.267.2272 to discuss your financial future.