If you're setting up a savings program, the kinds of accounts you save in and how you invest your money will depend on both your investment goals and how soon you plan to withdraw the funds.
Joe Snyder, Tangerine's product management analyst, investments, says whether you characterize your savings horizon as short (under three years), medium (three to five years) or long-term (more than five years) very much depends on personal priorities.
“My suggestion is to first create an emergency fund of three-to-six months' expenses and second, to tackle high-interest debt. Setting up a retirement savings plan is the next logical step," he says. “But to achieve your financial objectives, you should develop a plan, and stick to that plan."
Short-term saving
For short-term savings, like for an annual holiday or even the down payment on a house, Snyder suggests simply depositing the funds in a high-interest savings account could meet an investor's needs. “In these circumstances, it's important to preserve both capital and liquidity, so there's no point taking risk or trying to chase returns," he says.
Medium-term saving
If you're saving for a medium-term project, like remodeling your home a few years down the road, Snyder advises using a Tax-Free Savings Account. He says, “When your money will be sitting in an account for a longer period, you might as well shelter it from taxes, especially if it's going to be a more significant amount."
Longer-term saving
To achieve longer-term goals, like funding your children's education or accumulating money for the support of a disabled child, Snyder is a proponent of Registered Educational Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs). “The Canada Education Savings Grant and the Canada Disability Savings Grant are 'free money' available from the Federal Government that can help your savings grow more quickly over time," he notes.
RSPs and TFSAs
Depending on your current income level and your expected income in retirement, TFSAs and RSPs offer valuable tax breaks – provided you can resist the temptation to withdraw money for other expenses along the way.
Nevertheless, Snyder points out that in addition to saving for retirement, money in your RSP can be used for the down payment on your first home (Home Buyers' Plan) or to fund education or re-training (Lifelong Learning Plan). “Funds have to be paid back and you lose investment income on the money until they are, but unlike a bank loan, you don't have to pay taxes on the withdrawals or interest on the money borrowed from your own accounts," he explains.
How to invest?
So once you're saving regularly, how should you invest your money?
If you'll need the money within the next five years, Snyder recommends sticking with a savings account or guaranteed investment certificates rather than investing in the stock market. “In this low-interest environment, you're not going to make much on your money, but you also won't run the risk of losing it if the stock market tanks."
However, if you're saving for retirement five or more years down the road, Snyder says getting into market-based products like mutual funds could give you the best opportunity to save the significant amounts you'll need in the long term. “Low-fee, passively invested index funds are a great way for the average individual to invest in one or many baskets of securities they otherwise wouldn't be able to easily access," he says.
The opinions expressed are those of the participants and should not be construed as investment advice. Investments are not guaranteed, and their values change frequently.
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