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Saving vs. investing: the pros, cons, & differences explained

This blog is sponsored by EQ Bank. The views and opinions expressed in this blog, however, are my own.

Saving and investing are easy to conflate but they are actually two very different — if equally important — financial strategies. While both involve putting money aside for the future (instead of spending it now), each has its own specific goals, returns, and risks.

Read on to discover the differences between saving and investing, and learn what role each one plays in savvy personal financial management.

The differences between saving versus investing

What is saving?

Saving is the act of setting aside your money in the form of cash for a future expense or need. Typically, you would deposit cash into a savings account and leave it there to grow slowly but surely thanks to a guaranteed interest rate. You also don’t have to worry about losing your money as a savings account is a sure thing — there is no element of risk whatsoever.

Not only is your money safe, since your savings are in the form of cash rather than tied up in assets that can potentially depreciate, they are also easily accessible (a.k.a liquid). You pretty much have access to your money at any time and can make withdrawals whenever you need.

Saving offers low risk in exchange for lower returns. Because your money is easily accessible, cash savings are ideal for short-term financial goals, as well as larger long-term goals where you don’t want to be exposed to any chance of losing your money. With savings, you’re not looking to make big financial gains, rather you’re looking for a low-risk place to store your money, keep it accessible, and combat inflation.

What is investing

Investing also involves putting away money for the future, but instead of leaving your money as cash, your funds are used to buy assets (such as stocks or exchange traded funds) in search of higher returns.

Investing can be volatile and the value of assets can go up or down depending on a multitude of factors – from asset mix, supply and demand, company financials, and the prevailing economic climate – which means there’s more risk in exchange for larger potential gains.

The general consensus is that investing is the best course of action for longer-term financial goals where you don’t need access to your money for at least the next few years (volatility and risk tend to have an inverse relationship, decreasing the longer you hold onto an investment).

When you invest, your money is also wrapped up in assets, so it’s not as liquid as cash savings. You may have to go through a few extra time-consuming steps to access your funds, like selling off your investments and transferring funds between financial providers. If you’re invested in a registered account like a TFSA or RRSP, you may also have to factor for contribution limits and the tax consequences of an early withdrawal.

Unlike with savings, returns aren’t guaranteed when investing. As a result, when you do need to liquidate your investments and access your funds, you may end up with more or less money than you initially had.

  1. 4.00%$200 first year return based on$5,000 balance
    Monthly fee
    Transaction fees

Saving vs investing – the pros and cons

The pros of saving

  • There’s no risk of losing your initial deposit
  • You’re guaranteed to earn interest on your money, and returns are stable, consistent and predictable
  • Your money is kept liquid as cash, so accessing or moving around your savings is easy and quick (with GICs, there may be more limitations, though you can opt for terms as short as three months)
  • The best savings accounts in Canada, like EQ Bank’s Savings Plus Account, have no minimum balance requirements or withdrawal fees
  • Saving is easy and straightforward. Deposit your money and earn interest. No financial knowledge is required
  • There are TFSA and RRSP savings account options, which means you can grow savings tax-free (though, there can be implications when making withdrawals)

The cons of saving

  • While predictable and low-risk, returns are significantly lower. A savings account isn’t a replacement for a long-term financial plan or retirement fund
  1. 4.00%$200 first year return based on$5,000 balance
    Monthly fee
    Transaction fees

The pros of investing

  • Over the long-term, a well-diversified investment portfolio can deliver strong gains (hovering around 9.2% on an annualized basis). If you buy and hold for the long-term, you can see substantial gains that are much better than what you would get with a savings account
  • Ability to grow your investment through the increased value of equities, plus dividends can add up to further gains
  • Like with savings, you can grow your funds tax-free by putting your investment account in an RRSP or TFSA

The cons of investing

  • Returns aren’t guaranteed, and values can go up and down quickly. Investing for only the short-term can often lead to losses
  • Investing requires more knowledge and it is certainly more complex than just letting your cash sit in a savings account
  • Could fall prey to panic selling. If you don’t have the knowledge or the stomach to ride out short-term market fluctuations, you may be more likely to sell when the market drops and walk away with a loss
  • There are typically fees involved when investing your money with a brokerage or robo-advisor, unlike maintaining a savings account or a GIC where fees usually aren’t part of the equation


When you should save versus invest

Savings and investing both have their place in personal financial management. They can each help you achieve different objectives, and you’ll want to use both based on your particular goals.

When to save

1. An emergency fund

When an unexpected emergency strikes you want to be able to access your money as quickly as possible. Your priority is to protect your emergency fund and you don’t want to risk losing the value of your initial deposit because of stock market volatility.

2. Short “time” horizons
Opt for savings when you need your money in the short term of three years or less.

Investments should be kept in for at least three (and preferably a minimum of five) years to give them time to maximize gains and ride out market volatility, whereas with savings, you’re not worried about returns, rather you just want a dependable pot of cash at the ready.

3. When your financial goals have a specific timeline

If you have a clearly defined timeline as to when you’ll need your money – for example, if you know you need to buy a car in the next year – saving tends to be the better option. The reason being investments are often volatile and you can’t time your withdrawal to take place at the ideal period when values are up.

4. For critical financial goals where you don’t want to risk losing money

Savings are the right choice when you have a crucial goal and it’s essential to keep your money safe and not put the value at risk of losses, such as a daycare fund for your coming baby or a down payment for a home you plan to purchase in the next year.

5. When you’re nearing retirement

Retirement savings are crucial to ensure you can live comfortably once you stop working full time, so as you near retirement you want to take fewer risks with your money.

When to invest

1. Medium-to-longer term “time” horizons
When you don’t need the money for at least 3 (though preferably 5) years

To take full advantage of the growth potential of the stock market you need to leave the money in for at least five years to give your funds the chance to grow and weather the ups and downs of the stock market. It’s important to keep in mind that when you look at a snapshot of the stock market chart, it looks volatile in short periods of time, but over the long term delivers returns of around 9.2% on an annualized basis.

2. For longer-term financial goals

An investment fund is a good option when you’re planning for retirement decades in the future.


The best place to put savings

One of the best places to put money you want to keep liquid is in a high interest savings account, like EQ Bank’s Savings Plus Account. With EQ Bank, there’s no risk of losing your money and no monthly account fees, plus you’ll earn a solid rate of 1.25%1 interest on your cash deposit.

  1. 4.00%$200 first year return based on$5,000 balance
    Monthly fee
    Transaction fees

Other great alternatives for savings include a short-term GIC. While your money is locked in for a set period of time, there are GICs with terms as short as three months. A GIC also tends to have better interest rates than a savings account and your rate is locked in for the term of your GIC. Furthermore, unlike when you invest in the stock market, with a GIC there is no risk and your money is protected from wild fluctuations.

You can also opt to put savings in EQ Bank’s Tax-Free Savings Account. A TFSA is a great way to protect your deposit and not worry about paying taxes on any growth. Note, however, that withdrawing and contributing money can impact your TFSA contribution limits so you’ll want to be more cautious moving money in and out.

Where not to put your savings

Think twice about putting your money in a chequing account or under your mattress. Why? Most chequing accounts earn no interest and you may be more likely to spend it. Keeping money in a mattress is no better because your money will lose value over time with inflation since it’s earning no interest — not to mention that it can be stolen, easily misplaced, or even just forgotten.

The stock market: The value of investments is too precarious in the short term. You risk the value of funds decreasing in value just when you need them the most.


The best place to invest your money

If you’re new to investing or just don’t have time to manage a portfolio yourself, a robo-advisor is a great way to take advantage of passive investing.

If you’re comfortable with actively managing your own portfolio, opt for an online discount brokerage where you can maximize growth and enjoy low fees.


Why you should have savings before you invest

Even if you’re ready to invest, it’s vital to ensure you have a solid nest egg of cash savings before you dip your toes into the stock market or other assets. Anything could happen (from job loss to sickness) so make sure you have an emergency fund in a secure savings account that holds at least three months of living expenses. If you put your emergency fund into investments you risk losing big in the short term and then not having enough money to cover life’s unwelcome surprises.


The bottom line

When it comes to deciding between savings versus investing, there is no one size that fits all answer. The financial strategy that will work best for you depends on your specific financial goals. Be sure to play it smart and allocate a certain percentage of your money towards both savings and investing. Both play a critical role and can be achieved in tandem.

1 Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.