When to save and when to invest — choosing the right method to meet your financial goals

Is it better to save or invest?

This question is an eternal struggle for Canadians: is it better to save or invest? The answer depends on your goals. In some circumstances, saving is preferred, and in others, investing. A general rule of thumb is, if your financial goal occurs within the short term — for instance, within the next five years — then saving is preferred. On the other hand, it may be better to consider investing if your goal extends beyond five years, such as saving for retirement.

Why does the timeline of your financial goal determine which method is best? Because investing carries risk — which means you may need more time to recoup your investment if the market goes down. Therefore, for short-term goals, you should choose to save money. You will get a smaller return on your contributions than you would with investing, but your money will be safe. The best thing to do is look into a high-interest savings account (HISA). In a higher interest rate environment, HISAs at some banks offer reasonable rates. View Canada's best HISA options and their rates here.

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What is the biggest reason people choose not to save and invest?

Making money decisions can trigger a lot of emotions, which can lead to decision paralysis. The overwhelming feelings we experience when faced with money decisions is one reason Canadians choose not to save and invest at all. Instead, those decisions are often pushed to the side and ignored until a later date.

Why do people not want to invest?

A 2020 study from S&P Global on financial literacy showed that 68% of Canadians were financially literate, so why aren’t more Canadians investing? According to a recent poll conducted by CIBC, 23% of respondents said they have not started saving for retirement at all.

As humans, we tend to prioritize the most pressing needs first. Canadians are facing a cost-of-living crisis, inflation and increased mortgage rates, which may put immediate emphasis on things like paying our mortgages and putting food on the table — the thought of saving and investing for retirement tends to get pushed into the background.

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Why invest and not save?

The biggest reason why Canadians should invest is that it has the potential to grow their savings at a much faster rate than putting money in a bank account. Investing gives us access to compound interest — which is when your earned interest starts to earn its own interest — which helps our investment portfolio grow exponentially compared to savings, where we earn simple interest only.

Let’s look at an example of investing vs saving and the outcome of each when trying to reach a long-term goal:

Saving $250 a month over 25 years in a savings account with 2% interest would result in $96,968.58 at the end of the savings term. While investing $250 a month over 25 years in the stock market with an annualized interest rate of 7% would result in $202,517.92 after 25 years! Investing earns you over $100,000 more in your account than saving the same amount.

How does investing work?

By opening an investing account (TFSA, RRSP, RESP, Non-registered account, etc.) at a brokerage like Qtrade or Questrade, you can begin to invest. A brokerage facilitates the buying and selling of investments for investors. Next, you should buy and hold an asset within that investing account with the hopes that the asset will grow in value. There are many types of investments, with some of the most common being GICs, mutual funds, stocks, bonds, ETFs, index funds and cryptocurrencies.

Here are some ways you can grow your portfolio, as well as your earning potential, through investing:

1. Interest - You may earn interest payments during the duration of your investment
2. Dividends - A company may pay shareholders a portion of its earnings. Reinvesting dividends can grow your portfolio faster without adding more of your own money.
3. Capital Gains - An asset you purchased has increased in value and is sold for more than you bought it.

What is the main reason people don’t invest on a regular basis?

While financial literacy content has recently been added to high school curriculums across Canada, most Canadians of investing age never received exposure to those concepts growing up.

Investing can seem inaccessible, especially since some may think that it requires a high degree of specialized finance knowledge. However, technological advances, such as robo-advisors, and access to different types of brokerages have made it easier than ever for Canadians to begin investing, even without advanced financial education.

On top of the lack of specialized knowledge, there is a perception that you need a lot of money to begin investing. While that may have been the case decades ago, you can now open a brokerage account without any initial investment and start investing with any amount of money - even $5 a week!

These perceived barriers, combined with Canadians' focus on their immediate financial concerns, may result in investing being pushed off for another day that may never come.

Bottom line

Saving and investing each have their place in Canadians’ financial plans. For short-term goals, savings are the safer and better option — look for HISAs to earn more interest on your savings. However, for long-term goals, Canadians can benefit from investing, as it has the potential to significantly accelerate financial growth.

The barriers that used to keep Canadians out of the stock market have all but disappeared. If you are not confident about investing as a DIY investor, open a robo-advisor account. Don’t have a lot of money to invest? Start with your spare change. Don’t let the amount of financial knowledge or wealth you currently have hold you back from starting to invest. Time is the greatest asset you have in investing. The earlier you begin, the more time you have for compound interest to work its magic on the growth of your portfolio and help you reach your long-term financial goals.

Sources

1. S&P Global: Financial Literacy Around the World (2020)

2. CIBC: Canadians prioritizing their immediate savings goals over long-term investments: CIBC Poll (Feb 12, 2024)