Savings vs. Investment: Which Option is Better?
by July 9, 2019 / No Comments


Article Summary for Savings vs. Investment: Which Option Is Better?

Results from a recent Stats Canada poll revealed that the average Canadian saved $852 last year. While Canada’s top-earning 20% average total savings of $41,393, the lowest 20% of income earners earned high-levels of debt, spending an average of $27,935 beyond their means.

Saving a little here and there for an emergency fund or for a comfortable retirement is no doubt important. Every Canadian should have a plan, regardless of how old they are. However, it’s necessary to approach the decision of whether you should start saving or investing your money carefully by evaluating your current financial situation first. 

Credit card debt, also known as revolving debt, is debt that earns credit. If you have high-interest debt, such as credit card debt, this is especially important information. Since no high-interest savings account in Canada offers an interest rate that even comes close to the average Canadian credit card’s negative interest rate, it is likely in your best interest to eliminate any debt that you have as soon as possible.

The chart below provides a rough comparison of the amount of interest earned in a high-interest savings account and the amount of negative interest owed by using a credit card. The chart provides a vague idea of how savings account interest rate stacks up against a credit card’s negative interest rate, with the assumption that only the minimum balance is paid off each month:

Account Used Interest Rate

Interest Earned vs. Interest Owed 

(1 Year)

High-Interest Savings Account

$1,000 deposited @ 2.30% + $23
Credit Card $1,000 borrowed @ 19.99%

– $199*


As the chart above shows, the amount of negative interest earned from a credit card eclipses the amount of interest earned in a HISA. It’s always a better option to eliminate any credit card debt before moving forward with investing. Since there are an array of complexities that come with understanding how credit card interest works, the easiest rule to remember is to simply pay your balance in full at the end of each month.*Simplified figure. Rates and conditions vary depending on the type of credit card that you are using.

What If I Have No Debt?

If you currently have no debt or recently paid off your debt, saving and investing are two financial habits that every Canadian should practice simultaneously. Saving and investing seem similar in definition, but both are quite different from each other when assessing the details.

Distinguishing the purpose of each financial practice is essential in achieving financial success, as is knowing which savings and investment accounts are best suited for your savings goals.

Things to Consider Before Choosing to Save or to Invest

Three primary factors that separate saving from investing are time, risk, and fund accessibility. These circumstances depend on each other to help the saver and investor find the right balance for their finances.

Investment Timeline

Time has a significant impact on everything, but when it comes to your savings goals, how quickly you will need the money will dictate what type of savings account is best for your particular savings needs.

For example, for a shorter-term investment goal, like an emergency fund where you will likely want unrestricted access to your money at any point, a high-interest savings account will be your best bet. However, if you know you have some extra cash and won’t need it in the next couple of years and at the same time you are unwilling to risk losing value on that investment, then a GIC is the best option in that situation.

Risk Tolerance

Risk—or, risk tolerance—is another determining factor in where your savings and investments go. Risk tolerance is your ability to tolerate risk in the event that your investments experience sharp swings.

If you can handle some volatility when it comes to your finances and you won’t need the funds you investing for a while then investing in the stock market with a product like a robo-advisor might be an excellent option for you. You can check out some of the best Canadian robo-advisors on our robo-advisor comparison table.

On the other side of the spectrum is not being able to tolerate any risk at all. In that case, low-risk investments like guaranteed investment certificates (GICs) will help you sleep tight knowing your money will be insured and guaranteed.

If that sounds like your situation, then a GIC from a bank or a credit union would be a good option for you. You can use our GIC calculator to find the best GIC rates in Canada to help with your financial goals.

Fund Accessibility

Lastly, your choice of financial products depends on whether you will need your funds in the short term or long term.

Looking back to the example of an emergency fund (which all Canadians should have for situations like job loss or a medical emergency), putting money aside in a flexible account would be a good idea.

Tax-Free Savings Accounts, for example, can help you save but won’t be as flexible when it comes to withdrawing your money as soon as you need them. High-Interest Savings Accounts, on the other hand, are an excellent choice for an emergency fund. They offer a higher rate of return on your money and you can access that money at any point without penalization.

However, not all savings accounts are created equal. Be sure to do your due diligence and compare savings accounts to find the one with the terms suitable for your financial needs.

Another example would be savings for your retirement say when it’s still over thirty years ahead of you. In this situation, you probably don’t need access to your money right away and you can also benefit from investing in registered investment accounts like an RRSP savings account (for your cash savings), registered GICs (for a guaranteed return), and registered robo-advisor accounts.

Lastly, regardless of your savings needs, storing your savings in a variety of financial products (or in other words not keeping all of your eggs in the same basket) is always a good option.

Want to see how your savings account compares to the rest? Compare Best Savings Accounts


A Primer on Saving

Saving is the act of putting liquid cash away into a no-risk account, without the expectation of it gaining large sums of interest. Money placed into a savings account can earn interest, involves no risk or volatility, and is generally made up of the funds that remain after spending disposable income.

Generally speaking, savings can go into two types of accounts: high-interest savings accounts (HISAs) and savings accounts. The difference between the two is that HISAs offer interest higher than 1.05%, whereas savings accounts less than that amount.

As Canadians, we’re fortunate to have access to two additional savings accounts: the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP).

Both have their respective advantages and disadvantages. For example, both offer tax-benefits but have yearly contribution limits.

Building an emergency fund, going on your next vacation, to purchasing your first home are all achievable ambitions that a savings account can help with.

Types of Savings Accounts

The following savings accounts all come with CDIC coverage for savings up to $100,000 in value.

Tax-Free Savings Accounts (TFSAs)

A Tax-Free Savings Account allows you to shelter your savings or investments from taxes. TFSAs are versatile and can harness various investments such as stocks, GICs, and bonds, to name a few. They pose no risk. In Canada, TFSA interest rates do not exceed 3.25%.

Overcontributing to your TFSA will result in tax penalties. If you contribute more than your yearly limit, you will be taxed 1% on the total amount each month.

Registered Retirement Savings Plans (RRSPs)

Registered Retirement Savings Plan is a savings plan designed for retirement savings. The primary purpose of this savings account contributes throughout a lifetime. Once the RRSP owner hits the age of 71, they are eligible to move their investments into a Registered Retirement Income Fund (RRIF), which then becomes taxable income in their golden years.

There are several RRSP rules when it comes to making withdrawals and taxation. Typically, the RRSP tax rate ranges from 10% – 30%. This amount depends on your yearly income and age.

High-Interest Savings Accounts (HISAs)

High-Interest Savings Accounts (HISAs) offer high-interest on savings. Unlike the two aforementioned accounts, HISAs do not have a limit, but charge tax on the amount of interest earned on your investments.

A Primer on Investing

Investing is placing money into various types of growth options, with the expectation that the principal amount invested will yield substantial growth over time, generally more significant than the initial amount.

There are several investment options, such as GICs, robo-advisors and ETFs, and stocks, among many others.

Methods of Investing

There are a few methods of investing, separating themselves mainly from different levels of risk tolerance.

Guaranteed Investment Certificates (GICs)

Guaranteed Investment Certificates (GICs) are the most low-risk investments available in Canada. In fact, GICs operate similarly to savings accounts.

GICs allow customers to lend their money to banks or credit unions for a fixed amount of time in return for interest. During the term, the funds are inaccessible, hence their classification as an investment.

Compare the Best GIC Rates in Canada Compare GIC Rates


Robo-Advisors (Auto-Investing)

Robo-advisors are automated investing platforms that use an algorithm to invest on your behalf. Investors can set their risk profile according to their preferred method of investing and risk tolerance. Robo-advisors then manage those investments according to the investor. Like stocks, investments with robo-advisors are uninsured for loss.

Robo-advisors primarily deal with ETFs, which combine various investments to make one combined investment on your behalf. These investments can include stocks, bonds, GICs, and real-estate, to name a few. The volatility of using a robo-advisor depends on your risk tolerance, which is dictated by your age, income, financial goals, and the amount being invested.

The Stock Market (Self-Directed Investing)

The Stock Market allows investors to make active, self-directed investing. Investors build and manage their own stock portfolios, instead of using a stockbroker or robo-advisor.

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