Aug. 1, 2018
I recently found the simplest-ever guide to investing. It’s an infographic that covers all the basics in a clear, totally accessible way. You’ll love it if you’re a beginner, and you’ll admire its clarity if you’re an investing vet.
The best thing about this guide isn’t its simplicity, though. No, the real value here is in how it explains one of the most crucial yet most often misunderstood concepts of personal finance – the difference between saving and investing.
This guide and I are in complete agreement – money you’ll need within five years is savings and thus should be kept safe. Money you can let lie for five to 10 or more years can be invested, which means exposing it to risk in order to earn higher returns than you can get on savings.
We’ve been riding a long bull market for stocks and seen a lot of money made in areas like real estate, cannabis stocks and cryptocurrencies. It’s natural to want to tap into this wealth creation as much as possible with your own money. But if your time horizon is less than five years, there’s a strong chance you could lose money instead of growing it. Between five and 10 years is a grey zone – let your personal feelings about risk guide you in choosing whether to save or invest.
Here are three situations where you’re more likely a saver than an investor:
- You’re building a down payment for a home: Houses are darned expensive these days. Can you really afford to risk your down payment money in a stock market that could post double-digit percentage losses in a very short period of time?
- You’re a temporary worker: If you work contract to contract, you’ll need some cash parked safely to cover rent and other expenses if there’s a period when you’re not employed.
- You’re building an emergency fund: Your priority for this money is to keep it safe and intact more than it is to grow it.
Savings are best kept in a no-fee high interest savings account, where returns top out in the 2 to 2.3 per cent range.
This Globe and Mail article was legally licensed by AdvisorStream.