People close to you have probably told you to save, meaning to put money aside. You might be wondering why you should. Why is it so important?
First of all, saving means you put money aside to spend later. This money will come in handy when you want to travel, buy a car, a house, better electronics and so on. It will also give you a chance to deal with tough times and unforeseen events, like a broken-down car or an unexpected job loss.
There are many ways to save, and there is no minimum age to start saving. The earlier you start, the more money you will have for the future. There are a number of savings tools available to you from financial institutions. To choose the tool that best suits your needs, you must understand the role that interest plays in your savings. Interest makes your money earn more money for you!
Interest is an additional amount of money that has to be paid when repaying a loan. This additional amount is based on the interest rate. Interest is also money that a bank, credit union, or other financial institution pays you for parking your cash in a savings account.
Take the time to identify your goals, such as saving for a trip, buying a car or buying a house, and your risk tolerance to help you find the right savings tool for you. Your choices will depend on whether these goals are short, medium or long term and whether or not you are willing to take risks with your money.
Risk tolerance refers to an individual’s financial ability to handle loss on an investment (money set aside for future use).
Here are some examples of savings tools.
Savings account
This is an easily accessible account offered by all financial institutions. The interest rate varies from one institution to another, but is always low. It is a safe way to invest your money.
Guaranteed Investment Certificates (GIC)
This is a loan for a fixed term that you make to a financial institution. There are redeemable and non-redeemable GIC. Redeemable GIC have lower interest rates than non-redeemable ones. In general, GIC rates are quite low but are a safe way to invest money.
Redeemable means something that can be bought back
Bonds
Bonds are issued by companies or governments when they need money to finance certain projects. By buying a bond, you are lending funds to one of these institutions. The bond lets you invest money and earn extra money from the interest paid either by the company or by the government. However, the company may not be able to keep its promise to repay the bond if it has financial problems, which is why government bonds are safer.
Stocks
A stock is a form of ownership. When you buy stocks in a company, you become the owner of part of the company. By buying stocks, you hope to sell them at a higher price than your original purchase price. This is not a very predictable investment, because the stock price is influenced by the company’s performance. Some companies are more stable than others, so some stocks are safer than others. If you buy stocks in a company, it is important to follow the economic news to keep up with how the company is performing on the market.
Mutual Funds
This is a way to invest money in funds shared with many investors, where managers invest the money in stocks, bonds or other investments. The money is divided among several companies or governments, so the investment is less risky than buying stocks alone. However, there are risks associated with this type of saving, because if some companies experience major economic difficulties, they may not be able to pay back the money to investors.
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Taxable means something that is subject to tax.
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A fund is a special account containing a sum of money for the purposes of a person or group.
These are not savings tools, but rather different ways of using your investments. An example would be a Guaranteed Investment Certificate (GIC) in a TFSA.
TFSA “Tax-Free Savings Account”
In this type of account, the income generated is not subject to tax and the funds can be accessed at any time.
RRSP “Registered Retirement Savings Plan”
The amounts invested in an RRSP can be deducted from a person’s annual income. This reduces the taxable income and means paying less tax. Generally, these amounts are set aside for retirement.
RESP “Registered Education Savings Plan”
The Registered Education Savings Plan allows parents to put money aside for their children’s education. The income from this plan is not taxable, and the government adds a contribution to the amounts deposited by the parents.