Many people confuse the terms "saving" and "investing". I often see people who are saving their money for retirement when they really should be investing for retirement. And vice versa I see many people investing their money for a downpayment when really they should be saving it. To learn if you are doing what’s right with your money read on.
Saving is stashing. You are keeping your money safe so it’s there when you need it. If you are savvy, you “stash” it somewhere that it can earn a bit of interest. An example of this would be an ING savings account that earns 3.5% or a cashable GIC that currently earns 3.65% at Vancity. Saving has two key advantages. Your money is accessible and its value is predictable. If you put $15,000 into a savings account earning 3.5%, you can bank on getting your original $15,000 plus the interest.
Investing is putting your money to work. You send it out into the wide-world of the market and more often than not it comes back having grown from the experience. Investments can include stocks, bonds or mutual funds. These types of investments tend to provide higher returns over the long term.
Short term Risk for long term gains.
Companies are in business to make money, and most work very hard to do just that. So the trend in the stocks market is for money to grow, but it is unnatural for a company or even a sector to go up, up, up. There are often dips along the way. If you have a short timeline there are no guarantees. For example, at the end of year one your $15,000 could grow to $17,500 or it could fall to $12,000, it’s difficult to predict. Investing in the markets in the short-term could be risky, but over the long-term, say 10 years or more, investing in the markets has proven to be the best investment for growth.
So, when should I save and when should I invest? Here’s the basic yardstick.
- What do I want? Insert your goal here! (Work one goal through at a time.) Easy right?
- When do I need the money? Also pretty easy, when do you want to achieve your goal? Insert your date here.
- What do I need my money to do for me? This is where most people get stuck.
To get unstuck, you need to decide if you want your money to be safe and not have the potential to drop in value, or if you want it to go to work for you. And here’s the good news, you’ve already answered the question. It goes back to your timeline and your goal.
Saving - If you need to use your money within the next 3 years, you’ll want to make sure that it is there when you need it. You can’t afford to risk losing, so you would likely choose to keep it safe and save.
Investing - If you won’t need the money for 10 years or more, you have the luxury of time and with that comes the potential for real growth! You would likely choose to invest for greater returns over the long-term.
Saving for a Downpayment
Let's say you want to buy a condo within 2 years. You have $15,000 in the bank and you need $10,000 more for your down payment. Should you invest what you have in the market for quick growth? Or should you be saving and keep your risk to a minimum?”
You have a pretty major life goal that you want to achieve relatively soon. Even though you would like your money to grow quickly, you probably don’t want to risk investing it. What would you do if the stock markets tumbled the day you made an offer on your dream home? Even if the stock rebounds the next week, you may only temporarily lose your down payment, but you will permanently lose the condo.
If you have a short-term goal that you are serious about, prioritize safety, accessibility and predictability. Contribute monthly to a savings account.
Investing for your Future
On the flip side, if you are 35 and you are saving to retire at 55 you can ride out the ups and downs of the market and that means that you can let your money do the work so you don’t have to. Invest for long term growth in a diversified mix of stocks, bonds and mutual funds. Review your statements to make sure you are investing for your future.