Saving vs. Investing: Why Both Are Important

Saving AND investing your money is very important. These notions are often taken for granted because we have to wait to see the results of what we have put away.

Think of saving and investing as a seed you plant. When watered on a regular schedule it can eventually grow to a big plant with possibilities to replant or even share with others. However if you do not take care of the plant on a regular basis it will suffer and not grow to its full potential.

Saving and investing, though similar, have some big differences with them. Let’s start with saving. Saving though underrated can make a big difference in debt freedom. By saving for purchases instead of putting them on a credit card to pay off later, it allows you to avoid the fees that come with credit cards. Here is a list of some of the things you should save for and why.

Emergency Savings

With a very obvious subheading, this heading can still be misunderstood. This is not you saving for a repair if your car breaks down, or if your furnace stops working. This is much more poignant. The emergency savings, as the name suggests, is what you put aside for if you lose your job or your main income sources are no longer available. Many companies and jobs have become obsolete and may not come with a severance package to keep you on your feet. Some countries have employment insurance programs that will pay you up to 55% of your lost wages. But with the price of the cost of living going up in many cities, that amount may barely cover the essential.

Make building this fund a priority. You can do this by putting a large amount of money in it to begin and then adding a specific amount to it every month. For more tips on saving check out my blog post:Fixing Your Broken Budget. 

Sinking Fund

Sinking fund is just a fancy phrase for saving for planned or unknown purchases. You can have a sinking fund for many things. Some examples are: car maintenance, home repairs, travel/vacation, birthday presents, anniversary presents and Christmas presents, just to name a few. An easy way of creating this would be to:

1. Figure out the total amount you want to save
2. Right down when you want to save this by
3. Create a schedule of how much and how often you are going to put money aside for this goal

Doing a little at a time will make a big difference. You can often just set it and forget it by making your savings automatic. Depending on what you are saving for you can start with as little as $20-$50. My blog fixing your broken budget talks about the type of account you should use for this.

House down payment

The down payment for a house is probably one of the biggest savings goals you’ll have. Depending on what city/town you live in, this amount can vary tremendously. Often you will read about a specific timeline on how long this takes, but that number will vary greatly depending on your income and what other financial responsibilities you have.

Your down payment fund should be kept in an account you can gain interest on. Some financial experts will also suggest you invest it over a certain amount of time. In Canada, the suggested accounts to save you down payments are in registered accounts like a TFSA or an RRSP. However, depending on where you live, saving/investing alone, will still not be enough to keep up with housing prices going up so you may have to get more creative. I will talk more about all this in another post.

Okay, so we have talked about saving. Now let’s talk about investing!

Investing for Retirement

So why do I have to invest for retirement you may ask? Why isn’t saving enough? There is something called inflation. Inflation is the cost of goods and services that go up in price over time. An example is the cost of food. The price of a bunch of bananas is much more than it was 10 or even 15 years ago.

So what does this have to do with investing? Over time the value of your money decreases. What you bought 10 year ago for $20 dollars may cost you $40 to purchase now. This means that whatever you save now will not be able to buy you what you need 20-40 years from now.

You can combat inflation by investing your money. In order for this to work you have to earn a minimum of about 4% on your investments every year to combat inflation. When you invest you can make roughly between 4%-20% on your investments if you top that up with regular deposits into your investments account. The most interest you can get in a HISA is about 1.50% currently, which is why saving is not enough.

A very important thing to note is that investing is for the long-term. This is not a get rich quick scheme. The two best accounts to start saving for retirement are also TFSAs and RRSPs. I will explain more about these two accounts in a later blog. A regular savings account will not pay you enough interest to keep up with inflation rates, which is why it is important you invest for retirement.

Investing for Your Child’s education

Many of the reasons I mentioned in terms of retirement investing apply to saving for your child’s education. If you haven’t already noticed, the price of education has gone up significantly and continues to go up. Since you know that your child probably will not be thinking about post secondary school for at least the first 16 years of their life, time is on your side. Time is the best friend of investing. The longer you leave your investments to grow, the more you will have. (E.g. the plant analogy earlier.)

So which account do you use to save for your child’s education? In Canada, you would use an RESP (Registered Education Savings Plan). The benefits of using this account is that the government matches your contributions up to 20% each year. Another benefit of this account is that your money grows tax-free.

Do not take saving and investing your money for granted. Do things today that your future self would be grateful for 10 years from now. It’s time to #levelupyourwealth !

*Disclaimer: I am NOT a financial advisor. I’m sharing the things I am learning on my way to financial freedom. ALWAYS do your research.

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