Saving and investment are the two most important personal finance strategies that seem to be at the heart of self-management. While these two words walk together, they have specific goals; these specific goals also bring along a variety of risk, return, and time horizons. If you are planning a sound financial future in Canada, where every door has at least one efficient saving and investment tool, knowing the difference between saving and investing is important.
Below is the comprehensive blog on saving versus investing, the advantages and disadvantages of both, how to prioritize one over the other, and the best options available for Canadians looking to save and invest wisely.
What is Saving?
Saving is accumulating funds for future use in a low-risk financial instrument of very high liquidity. In general, the most important goal of saving is security- to have money available to meet unexpected or short-term needs.
Common Saving Goals
- Emergency Fund: A reserve cushion in case of emergencies such as a car that breaks down, medical emergencies, or job loss.
- Vacation Fund: Saving money for trips that have actually been planned.
- Big Purchases: Saving for big-ticket items, like down payments on a home, new furniture, or education.
- Retirement (Near/Future): For a person close to retirement, it might be important to save over riskier investments.
Key Characteristics of Saving
- Low Risk: Savings accounts are covered by institutions such as the Canadian Deposit Insurance Corporation, so your principal is always secure.
- Liquidity: It offers liquidity, which means you can easily access the money when you need it; savings accounts allow easy access to your money.
- Low Returns: The price paid for safety and liquidity is generally low interest rates. With inflation, your savings could also lose value over time in terms of purchasing power.
- Short-Term: Saving is suitable for short to medium-term goals. You require funds within a few months or years, so you’re not so concerned about its growth potential, but accessibility is paramount.
Popular Saving Options in Canada
- High-Interest Savings Accounts, HISAs: These earn a higher rate of interest than ordinary savings accounts and are still highly accessible.
- Tax-Free Savings Account: TFSA is another investment option through which you can invest, although it is a very popular savings vehicle because of tax-free growth and tax-free withdrawal.
- Guaranteed investment certificates: GICs offer a locked-in, fixed return for a set term, although you usually can’t access your funds until the term is complete.
- Savings Bonds: Government-backed bonds offering probably minimal pre-tax rates but with a fixed return: the interest is guaranteed.
What is Investing?
Conversely, investing essentially involves putting money into assets; this could be in the form of stocks, bonds, real estate, or mutual funds and is expected to generate a better return later on. While it is generally riskier compared to saving, it also has the potential to yield bigger rewards.
Common Investment Goals
- The Retirement Long Term: For young investors, it’s often the hope to build up a lot of money over several decades.
- Savings and building of wealth: Increasing your overall worth by compounding the effect of interest and capital gains.
- Education Funds: Investment can also be used to grow funds for future educational expenses, especially for children.
- Business Ventures: The investors use their returns to fund entrepreneurial activities or new business opportunities.
Key Characteristics of Investing
- Higher Risk: There is no guarantee that you can gain a return when investing in the stock market, and you might even lose part of or even the entire money.
- Potential for Higher Returns: Investing carries with it a higher level of risk; however, this risk might work to increase possible returns, especially within a longer time frame.
- Less Liquidity: Some investment products may not be as liquid as saving. It may not easily be accessed when its owner needs the amount of money. The selling of stocks or any other real estate will take some time and perhaps fetch less than the desired price.
- Long-term focus: Investment is generally made for long-term goals where one rides out the ups and downs of the market.
Popular Investment Options in Canada
- Stocks and Bonds: These are ownership of a company with a potential for dividends and capital growth, while others give regular interest payments and return of the principal.
- Mutual Fund and ETF: These would be pooled investment vehicles, allowing you to invest in a diversified portfolio without having to select individual stocks and bonds.
- Real Estate: Property investment can generate rental income and eventually appreciate in value.
- Registered Retirement Savings Plan (RRSP): This provides Canadian retirees the opportunity to save for an income source in retirement with a tax advantage. Contributions are deductible against income for that year, and earnings grow tax-free until the time of withdrawal.
The Main Differences Between Saving and Investing
While both saving and investing are essential components of a solid financial plan, they serve different purposes. Here’s a comparison to highlight the major differences:
| Factor | Saving | Investing |
| Risk | Low risk, principal is safe. | Higher risk, principal can fluctuate or be lost. |
| Returns | Low returns, typically fixed. | Potential for higher returns, variable. |
| Time Horizon | Short- to medium-term. | Long-term focus. |
| Liquidity | High liquidity, easy access to funds. | Lower liquidity, may take time to access. |
| Purpose | Emergency fund, short-term goals. | Wealth building, long-term goals like retirement. |
| Best for | Safety, preserving capital. | Growing wealth over time. |
When to Prioritize Saving Over Investing
There are times when saving should take priority over investing, especially if your financial situation demands easy access to cash. Consider saving if:
- You Don’t Have an Emergency Fund: The first rule of financial security is having a robust emergency fund. Most experts recommend that you save enough money to cover three to six months of living expenses in an easily accessible account, such as a high-interest savings account.
- You have short-term financial goals: Do you need to use this money within a few years? For example, do you want to purchase a car or pay for a wedding? In this case, keeping it in the bank is a better idea because the risk of loss in investments outweighs potential gains, especially in the short term.
- You Have High-Interest Debt: Pay off debts that carry higher interest rates, such as credit cards or payday loans, before investing. The interest saved from paying off debt will often outweigh the potential returns you could garner from investments.
- You’re Risk-Averse: If the fear of losing money sends you to bed at night worrying, savings accounts and GICs might be the right choice for your sleep.
When to Prioritize Investing Over Saving
If you have your emergency fund in place and want to build wealth for the future, investing may be the better option. Consider investing if:
- You have a Long-Term Financial Goal: When the investment horizon is above five years, as retirement will do, you receive compound growth when you invest.
- You Want to Beat Inflation: Savings account interest rates normally do not keep up with inflation. Investing puts your money to work, so it has a chance of outpacing inflation, which means that your money will still be able to buy things in the years to come.
- You Could Tolerate Market Volatility: If you are able to stomach up and down action in the market, then investing may offer a better long-term return.
- Maxed Out Savings: Once you have done that, it’s time to put excess money into investments that may offer you the prospect of having greater growth in due course.
Building a Balanced Financial Plan: Saving and Investing Together
Most probably, most Canadians will find saving and investing useful rather than trying to decide between the two options because it is actually the only approach that makes sure that liquid funds are available for emergencies and short-term needs and allows your long-term savings to grow through investments.
How to Balance Saving and Investing
- First, maintain an Emergency Fund: A cushioning emergency fund is a good starting point- an amount that will cover unexpected expenses and help avoid needlessly withdrawing from your investments during a market downturn.
- Contribute regularly to both: Allocate some amount each month for savings and for investments. Now, let’s take an example of how you can divide your savings: maybe 70% towards short-term goals, which could be emergencies or just building up a good emergency fund, and 30% towards investments.
- Use Tax-Advantaged Accounts: Take advantage of tax-advantaged accounts: Use the available Canadian financial tools in the form of TFSAs and RRSPs. TFSAs are versatile because they can be saved and/or invested in. Any earnings are, therefore, tax-free. RRSPs are excellent for retirement savings because the account maintains the right for tax deferral.
- Diversify Your Investments: Spread your investments across various asset classes, including stocks, bonds, and real estate, to diversify and hence minimize your risk. This strategy is called diversification; it reduces the risk that any given poor investment makes on your portfolio.
- Rebalance Periodically: Time goes by; your goals, risk appetite, and personal life evolve; it is time to review your savings strategy periodically to check up against your goals.
The Role of Inflation in Saving and Investing
One crucial element that dictates whether you save or invest is inflation. If one looks at the average inflation rate in Canada over the past several decades, one can notice that it has, on average, remained around 2-3% per year. The translation of this means that whatever money goes uninvested will continue to lag behind inflation, so your purchasing power is going down with each passing year.
- Impact of Inflation on Savings
Savings accounts, whether they be high-interest ones or not, do not offer enough interest to win the inflation war. Suppose it is offering 1.5% interest where the inflation rate is 2%. This means you will be losing 0.5% of your purchasing power annually. It can only be through proper investment strategy for long-term goals that when the return on investments is bigger than the inflationary trends can be sought.
- Impact of Inflation on Investments
Historically, equities investments, or equities stocks, have outperformed inflation. At the same time, there is always a risk that inflation could reduce the real value of your return on investments if they do not grow fast enough; that is why an investment portfolio has to be balanced and can incorporate inflation-protected assets, such as real estate or indexed to inflation bonds.
Saving vs. Investing: Which Should You Choose?
The choice between saving and investing depends largely on your financial goals, risk tolerance, and time horizon.
- If You’re New to Personal Finance: Focus on building an emergency fund first. Once that’s in place, start learning about investment options that align with your long-term goals.
- If You Are Seeking Security: Saving is the way to go. This is because, in terms of security and providing peace of mind, it beats a lot of things, especially short-term requirements or for those who hate taking risks.
- If You Want Growth: Investing offers the potential to build wealth through compound interest and market growth. It’s best for long-term goals, such as retirement, saving money for your children’s higher education, etc.
Final Thoughts: Saving and Investing for Canadians
Indeed, there is much to choose from in Canada regarding saving and investing. The saving side of the equation provides Canadians with a good number of mediums that may be efficiently used for saving with high-interest savings accounts, GICs, TFSAs, RRSP accounts, and RESP accounts, to name a few. The investment side provides an equally long list of vehicles for Canadians, including mutual funds and ETFs, to name two, but certainly real estate and stocks.
Thirdly, knowing how saving fits into your financial plan and comparing that with investment really gives you a feel of where to place trust to get the most out of money. That way, by balancing the security of savings with growth potential, you’re really achieving stability in the short term and creating wealth for the long term.
Therefore, saving or investing – a little bit of both – is crucial in securing the kind of future you want for yourself and your loved ones.
Learn More: What’s the Difference Between a Financial Planner and a Financial Advisor?