Money sitting in savings? Now what?
Having money sitting in a savings account may feel like the safest option, especially during periods of market uncertainty.
While keeping money in savings can provide stability and accessibility, you may be missing out on potential for it to earn significant annual growth or interest. It’s like your money is stuck in neutral — steady and ready when you need it, but may not be able to help you move forward.
Considering the effects of inflation on your funds is important too when evaluating ways to ensure your purchasing power keeps pace over time.
💡That goes for money kept in a traditional chequing or savings account, or in a “registered” savings account such as an RRSP savings account or a TFSA savings account. While there are tax advantages associated with the latter two types, the interest earned in the account from year to year is small relative to the potential growth you could earn with the same amount of money invested in, for example, a mutual fund housed in an RRSP or a TFSA.
So what might the next step be? Investing in mutual funds is a possibility to consider, since it can offer greater long-term growth potential.
If you’re likely to use the funds in two years or less, simply earning interest is smart, but try to make sure you're earning a reasonable amount of interest to keep up with inflation.
If you don’t need the money in the near future, you might want to consider investing in mutual funds or portfolios.
You may have hesitated to put your money in investments for numerous reasons — a fear of market volatility, for instance. An advisor can help you sort through your options to find a solution that matches your tolerance for market ups and downs.
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How to get started with investing
Here's a simple investment strategy that can take advantage of rising markets over time and help you manage the emotional risks of investing.
Consider splitting your available money into two pots
Pot #1: Money to invest now to take advantage of expected longer time in the market.
Pot #2: Money to invest gradually over time, on a regular schedule. This can feel more comfortable and may help you take advantage of swings in market values.
Decide how much to invest
Before you decide on how much money you are willing to invest, you must determine your risk tolerance. In the end, it’s up to you to determine your comfort level for exposing some of your money to market risk.
You might invest 10%, 20%, perhaps even up to 50% or more of the available cash sitting in savings. Again, it comes back to your comfort level and goals.
The key is to get started.
👉Did you know? All mutual fund dealers, including Tangerine Investments, are required by regulators to create an investor profile that includes your financial situation, investment objectives, time horizon, risk tolerance and knowledge of investing. By answering a series of questions, both you and the dealer can determine an investing plan best suited to your situation.
Start investing on a regular schedule
Investing on a set schedule can help take the emotion and worry out of the investing process, and it takes advantage of an investment strategy known as dollar-cost averaging (see below).
After your initial investment, you might set your remaining funds to automatically be invested every two weeks or every month over an 18-month or two-year period (or until there’s a material change in your circumstances.). This can make it easier to stick to your plan and get accustomed to market fluctuations.
How dollar-cost averaging works
💡Dollar-cost averaging is an investment strategy where you automatically invest a set amount of money regularly over a set schedule. With this approach, you automatically buy more units when prices are lower and fewer when prices are higher. While it doesn’t guarantee gains or protect against losses, it can reduce the impact of market volatility over the short term, and can help take the emotion out of deciding when to invest. Read more about dollar-cost averaging in our article about automated investing.
The pros and cons of leaving your cash in a savings account
Deciding where to put your money depends on several factors. If you cash on hand, whether inside your RRSP or TFSA, or simply in a savings account, here are some potential benefits and drawbacks to consider as you think about what might be right for you.
Pros
👍 Your money is readily accessible for any large purchases or expenses you have coming up. (Note: an exception is if you have an RRSP savings account, in which case any withdrawal, unless you are withdrawing to buy a home under the Home Buyers’ Plan, would be subject to withholding taxes.)
👍 Savings accounts are not exposed to the swings of the market. The amount you have saved up remains steady.
👍 Most savings accounts in Canada are insured by the Canadian Deposit Insurance Corporation (CDIC) in case of default, up to $100,000 per account.
👍 You may earn a modest amount of interest on your savings.
Cons
👎 You miss out on the potential for higher growth if your money isn’t in the market.
👎 While savings accounts may earn interest, returns may not keep pace with inflation, which can gradually reduce purchasing power over time.
👎 Because the money is so readily available, you may be tempted to spend the money instead of saving it for the future.
👎 For non-registered accounts, interest income is taxed at a higher rate compared to dividend income and capital gains.
When does it make sense to put your money in mutual funds?
There is no one-size-fits-all answer. The right approach depends on factors such as emergency savings needs, financial circumstances, goals, time horizon and comfort with risk. Once your short-term cash needs are covered, it might be time to consider whether investing aligns with your future goals and plans.
For short-term goals or money that may be needed soon, keeping cash in a savings account may make more sense because the funds remain accessible and protected from market fluctuations. But for longer-term goals, investing may offer greater potential for growth over time than holding cash alone.
Before investing, many financial professionals usually recommend building an emergency fund and paying down high-interest debt. From there, Canadians can think about whether investing fits with their personal financial situation and long-term goals.
READ MORE: How to build an emergency fund
What’s your risk tolerance?
Every investor needs to consider for themselves their long-term investing goals and the degree of risk they’re willing to accept. While an aggressive investment strategy can be too much for many to stomach, an overly conservative approach of keeping your savings in cash may hinder growth potential and increase the risk of falling short of goals, especially after factoring in inflation.
Tangerine Investments offer a range of well-diversified, low-fee1 portfolios with different amounts of potential risk and return, that are regularly rebalanced to maintain the level of risk you’re comfortable with.
When you open an account, either online or with one of our advisors, we will walk you through a series of questions to assess your goals, time horizon and risk appetite, in order to select the portfolio best suited for your unique needs.
When it comes to investing, keep it simple
Follow a simple strategy within your comfort level. It’s important to understand what you're paying in investment fees, and to determine if that's reasonable to you or not.
The key to getting back into investing after a long time away, or anytime you decide to invest, is to not guess where markets might go. Remove the guesswork, invest in a way that's comfortable for you, and put that money to work.
1A fund's expenses are made up of the management fee (including the trailing commission), operating expenses, trading costs, and fixed administration fee. The annual management fee is 0.80% of each Tangerine Core Portfolio, 0.50% of each Tangerine Global ETF Portfolio, and 0.55% of each Tangerine Socially Responsible Global Portfolio. The fixed administration fee is the same for all Tangerine Investment Funds and is 0.15% of each Portfolio’s value.
