Wednesday, June 29, 2016
Saving Money vs. Investing Money
Bay Street often refers to money in investment accounts as savings. Industry funded research also refer to investments in mutual funds, stocks and bonds as savings. The reports state that those investors with advisors “ save” more than those without . This is not quite accurate as there are very important differences between savings and investments.
Investments are volatile and may not be available when you need the money most. Market losses , early redemption charges and general illiquidity can reduce the amount of cash available. Obviously you must not put a large amount of money in a long-term investment for your down payment on a house that is closing in a few months. When the lawyer asks for the house money you can’t say: “Wait!.. the stock market is down 50%, you will have to wait until it recovers..”
There are two primary types of savings programs you should include in your life. They are:
1. As a general rule, your savings should be sufficient to cover all of your personal expenses, including your mortgage, loan payments, insurance costs, utility bills, food, and clothing expenses for at least six months. That way, if you lose your job, you’ll be able to have sufficient time to adjust your life without the extreme pressure that comes from lliving pay cheque to pay cheque .This is referred to as an emergency fund. According to a 2015 CPA study , slightly more than half of Canadian working households said they did not save on a regular basis and only half of those surveyed said they maintain a special reserve fund for unexpected financial emergencies. The almost one fifth of respondents who indicate having an emergency fund said that their fund would not cover regular household expenses beyond four weeks.
2. Any specific purpose in your life that will require a large amount of cash in five years or less should be savings-driven, not investment-driven. The stock market in the short-run can be extremely volatile, losing more than 50% of its value in a single year. Paying. down a home mortgage is a great example of saving- it will cut the balance owing while cutting monthly mortgage payments. Interest paid on mortgages is not tax deductible .
Financial advisors that cannot distinguish between short-term savings and long-term investments or are more interested in putting you into a high commission investment or ignore your 18% credit card debt are dangerous - in such a case you need to find another advisor!
Only when these things are in place, and you have adequate property, life and health insurance, should you begin investing .The only possible exception is putting money into a pension plan at work if your company matches your contributions. That’s because not only will you get a substantial tax break for putting money into your retirement account, but the matching funds basically represent free cash that is being handed to you on a silver tray and there may be material bankruptcy protections in place for assets held within such an account should you be wiped out entirely. A RESP is another good example because of the Government Education Grants.
Remember, it's your money.