You’ve been told for years that you need to save money and perhaps it’s one of your New Year’s resolutions, but do you know what your savings and investment options are and have you made a decision?
Three Factors to Consider for Savings and Investment Options
When deciding where to save money, there are at least three factors to consider: risk, return, and liquidity.
Risk refers to the volatility of the investment (all savings are investments) and whether the principal invested could be lost. Investing directly in businesses is riskier than investing in an equity portfolio, which is riskier than a bond. The least risky option is a savings account at your local bank.
The return you earn on your savings/investment is the growth potential. There is a relationship between risk and return — the riskier the investment, the higher the potential return. When investing in a business, it could become the next Amazon … or the next Blockbuster. There is no guarantee on business investments.
Equities (stock market) are substantially risky, but there are ways to mitigate some of that risk. Bonds have a guaranteed return, but they may lose or gain value depending on the interest rate. Savings accounts are typically guaranteed by the government (up to a certain threshold) and your principal will never be lost, but the rates of return tend to be less than prime.
Liquidity is your ability to access the funds for personal use or investing elsewhere. There is a relationship between risk-return and liquidity. The easier (liquid) something is to access generally means it has lower risk and return.
Bank Savings Accounts
Banks usually offer chequing and savings account options, with a variety of savings accounts to choose from. Rates of return are generally below prime – often significantly below. Your principal is secure, and you can easily transfer money to your chequing account for use (typically in one business day).
But with the return not even meeting the rate of inflation, you are giving up purchasing power if you keep all your savings in a bank account. A savings account is most useful for short-term goals, not long-term prosperity.
Guaranteed Investment Certificates (GICs)
GICs have become less popular over the years, but many banks and financial institutions will still offer them. The return is typically marginally better than prime, and the principal is guaranteed. But GICs require you to hold the certificate until it matures, which may be as little as 3 months or as much as 5 years.
Funds invest in a wide range of equities and bonds from markets all over the world. There are thousands of funds available, which allow for a mix & match approach to risk and return — many combine the diversity of bonds and equities in the same fund. While banks offer a variety of bonds and mutual funds, to access a wide selection of options, seek an independent financial adviser. You may not have access to your money for a week or more when you choose to cash out.
Buying directly into the stock and bond market is more complex than the average person is willing to tolerate. There are many low-cost options available online, but they come with minimal support and require you to do the research and evaluation of prices. Stocks are more liquid as you can convert them to cash quickly, but if you’re struggling to get out of debt, diving into the stock market directly may not be your best bet.
Knowing what your savings and investment options are, and evaluating the risk, return, and liquidity of your savings options will help you decide. If you’re having trouble finding money for savings and investment due to debt, we can help! Book your free consultation with us here.