Should I save, or invest, for the future?

8 minute read

You want to make the best choices for yourself, your family, and your future. But the modern financial world can be a difficult one to navigate – and you want to make strong decisions now before you run out of time to set yourself up for success.

In some financial spaces, the terms saving and investing are either used interchangeably or used to refer to entirely different things, which can be confusing. That's because they often refer to the same thing, but through different methods.

What do we mean? Let’s go deeper into saving vs. investing, how they’re different, how they’re similar, and which avenue is best for your goals.

The key differences between saving and investing

Think of it this way: saving is choosing the destination, and investing is choosing the vehicle to get you there. Saving means your money is resting, while investing means your money is working hard for you.

Depending on which of these goals you’re mapping out on your saving journey, some investing vehicles will be better in helping you achieve some goals over others. Your long-term goals will generally need more saved to accomplish them than your short-term goals.

We put emphasis on goals because your savings accounts should serve different purposes. Here are the qualities you should look for in a savings account for each goal.

Long term savings	Short term savings
Difficult to withdraw until needed, to deter from using savings Able to add after initial deposit Option to be market-linked to earn even more in interest	Cashable as needed to pay for quickly upcoming expenses Able to start from a lump sum Option to guarantee returns outside of market performance

Your needs may be different depending on each goal, so seek the guidance of an advisor who can suggest an account based on your long- and short-term goals.

Saving your money

‘Saving’ in itself can be a broad financial term. Generally, it refers to the internal action of accumulating money for a goal. The goal can be as specific or broad as you want it to be; it never hurts to save for an emergency fund – more on that in a bit.

You might have several long-term saving goals, like retirement, education, real estate, vacations, or an emergency fund. But maybe you have shorter term saving goals too, like buying a new car, hosting a wedding, or attending a once-in-a-lifetime concert.

Since saving is a largely internal action, it is usually lower risk than other counterparts that participate more actively in the market. A few options to consider that can help boost your saving plan are term deposits and high interest savings accounts.

What are term deposits?

A term deposit is a low-risk investment that guarantees your principal investment and can be customized to your goals. They’re also known as Guaranteed Investment Certificates (GICs) and can support both short-term savings goals and long-term investment plans.

Term deposits can be cashable or non-cashable, as short as 30 days or 5 years, locked in at a fixed rate, or a variable rate product, which fluctuates along with changes to prime rate or market performance of pre-selected securities. It all depends on what you want to achieve with them.

Tax benefits through registered accounts

Best of all, term deposits are available in registered accounts, which means you can possibly offset your taxes with your contributions if you open your term deposit in a Registered Retirement Savings Plan (RRSP). You can also get tax benefits from opening a term deposit in a Tax-Free Savings Account (TFSA). While you will not be able to offset your tax bill with TFSA contributions, what you grow in a TFSA is not taxed at all.

This is important, because any interest income you generate from your term deposit is paid out at the end of your term, but you are still taxed annually on this income. There's a lot to consider with term deposits; read more to get an overview of term deposits, and some ideas of how you might incorporate them into your financial plan. Plus, learn how laddering can be a great strategy to start now.

What is a High Interest Savings Account (HISA)?

A high interest savings account, or a HISA, is designed for maximizing your savings. HISAs offer a base interest rate. You can also open them in a registered account, such as an TFSA or an RRSP.

Because it works best as an account left alone until you need it, but also benefits from interest, HISAs have the best of term deposits and of traditional saving accounts: you can use them to earn more interest, but you can also add more than your initial deposit, and access your funds at any time.

Investing your money

On the other hand, investing is all about the tools to get you to the saving destination, because many of them happen externally outside of your realm. This is where there is potential to earn a lot more, but because of that, there is also a higher risk of losing more. You may have heard of mutual funds; we’ll explain more about what they are and how they can help in your investing journey.

What is a mutual fund?

Mutual funds are investments that pool money from many different people and invest those funds for specific objectives. Each shareholder of this pool of money participates proportionally in the gains or losses of the fund.

Think of it this way: instead of buying shares from one another as they do in the stock market, investors buy shares right from the fund, usually through a broker who will buy them for an investor.

You can buy your mutual funds in non-registered or registered accounts, such as a TFSA, RRSP or RRIF. They are managed by fund managers, who watch your investments and keep your portfolio balanced. If you’re comfortable taking on more risk and seeing your returns grow over the long term, mutual funds could be worth exploring.

When to choose a term deposit

So now that we’ve discussed all these vehicles for growing your savings, what are the best situations to use them? Term deposits can help safeguard your investments, while nurturing them into guaranteed returns.

Term deposits for short-term goals

There is a place for term deposits in your short-term saving plans, such as a rainy-day fund.

Do you have a rainy-day fund? According to numbers from Statistics Canada, one in four Canadians could not cover an unexpected expense of $500 if it came up suddenly. A redeemable term deposit can be a great place to nurture your savings for any unexpected expenses that come up.

Term deposits for long-term goals

Meanwhile, term deposits can also be a great place for your long-term goals, like an emergency fund.

What makes an emergency fund different from a rainy-day fund? Your emergency fund is intended to be 3 months of income to pay for expenses, should an emergency come up that meant you had to take extended time off work.

Numbers from Statistics Canada show that just under two-thirds of Canadians have enough to cover 3 months' worth of expenses in their emergency fund. It’s important to have money set aside and spoken for when an emergency expense comes up, because it will mean you don’t have to opt for high-cost loans and can make decisions with the peace of mind that you have a safety net.

When to choose a HISA

The best way to use a HISA to its fullest potential is to stash away your savings into a registered account, like a TFSA or RRSP.

HISAs for short-term goals

For example, you can open a HISA in a TFSA to maximize your contribution room and take the money out when you achieve your goal. This makes it a great saving tool for saving for a new car, for an upcoming trip, or any of the other short-term goals we outlined earlier.

HISAs for long-term goals

Meanwhile, if you choose to open your HISA as an RRSP, it can be a great way to get tax benefits from your contributions and keep the account accumulating income for retirement.

Let’s say you open your HISA in an RRSP at 40 as a passive way to pad your retirement savings. You want to retire at 65, so you commit to automatically contributing $100 per month. You don’t even have to think about it, it’s the amount of a few dinners out each month, so you’re happy to send that to your retirement fund instead.

Over the course of 25 years, you will end up with $30,000. That’s not even including the high-interest rate of all your contributions, or the benefits you get back each tax year from contributing! It doesn’t take much each month to add to up to a substantial addition to your retirement plan.

This is likely not enough to retire fully on, but if you have an RRSP with your employer, this can be a great way to add extra padding to your RRSP through another means and calm your nerves about retirement.

When to choose a mutual fund

The key is to commit to a long-term investment with a mutual fund, and to be willing to wait through the tougher times in the market. A fund manager keeps a watchful eye on your investments and adjusts your portfolio when the market takes drastic turns.

While they are paid a cost to do this, called a management expense ratio (MER), it means that you don’t have to dive too deep into stocks yourself.

Getting started

Wondering where to get started? Good advice starts with a conversation between you and your advisor about your unique situation. Get in touch today so we can help make that happen.