Saving or Investing...What's the Difference?
Transferable skills
Curriculum expectations
F. Financial Literacy
F1.3 explain the concepts of spending, saving, earning, investing, and donating, and identify key factors to consider when making basic decisions related to each
F. Financial Literacy
F1.2 identify different types of financial goals, including earning and saving goals, and outline some key steps in achieving them
Introduction
What does it mean to save and how is this different from investing?
Should your decision to save or invest change depending on your financial goal?
Let’s explore different ways someone might meet their financial goals using saving and/or investing!
Teacher Chelsea says: Before we get started, remember that everyone’s financial situation looks different. It’s important to be respectful and avoid comparing ourselves to others.
Financial goals
Learner Mehar talks to Teacher Chelsea about a financial goal (part 1):
Learner Mehar: I really want to get a new watercolour set so I can make some cool pieces for the art show.
Teacher Chelsea: What if you made a financial goal to help you save for it?
Learner Mehar: What would I need to do?
Teacher Chelsea: Well, you need to decide what you want to buy, figure out how much money you need, and then plan!
When setting a financial goal to save for an item or experience, we might ask ourselves some of the following questions:
- What am I saving for and why?
- How much do I need to save?
- Is there a specific time frame?
Budget
Next, we might revisit our budget to explore how we can adjust it to meet our goal. Savings goals can be small or large. The important thing to remember is that a savings goal should be realistic for you. It might mean that you take a closer look at your expenses and cut down some of your spending.
Press the following tabs to review the steps for creating a budget.
It’s okay to feel a bit stressed or confused when thinking about money. Everyone is different, and that means that your decisions will be based on what works best for you.
What are some of the main things you are spending your money on? Are these purchases needs or wants?
Do you have a source of income? If so, estimate how much money is coming in per week or per month.
Whatever your savings goal is, once you know how much money comes in and where it goes, you can decide how to move forward. Perhaps you want to make more money, spend less, or just avoid overspending.
You can always adjust your budget as you need, if there are changes to your income, expenses, or goals. Again, a budget should be tailored to your needs. That means it works for you!
Timeframe
Is your goal a short-term, mid-term, or long-term goal?
Short-term goals are things you want soon, like art supplies or a game.
Mid-term goals are things you’ll need to save for a bit longer, like taking a special class or a fun outing with friends.
Long-term goals are things you want to have further in the future, like a car or post-secondary education.
Now, it’s time to consider what kind of strategy you will use to save your money.
Will you save or invest?
Learner Mehar talks to Teacher Chelsea about a financial goal:
Learner Mehar: I know which paint set I want to buy and how much it costs.
Teacher Chelsea: Great! You’ve completed the first step!
Learner Mehar: The art show is in eight weeks, and I need two weeks to create some new pieces.
Teacher Chelsea: So, we need a six-week plan!
Saving
Saving means putting money aside for future use, instead of spending it right away.
Once you’ve set your goal and decided how much money you can put aside each week or month, the next step is to decide which methods you’ll use to manage your money.
You might decide to do this using the jam jarring method, or speak to your bank about opening a savings account.
Before we continue, let’s pause to consider some vocabulary terms connected to our learning.
Vocabulary terms
Press the following terms for their definitions.
Jam jarring or enveloping is a budgeting method where you separate different amounts of money for expenses at the beginning of the month or week (e.g., groceries, bills, entertainment etc.). You can put the money in a physical jar, envelope, or a digital pot – some banks have the option to create a sub-account within your bank account. It’s a great way to see exactly where your money is going.
A savings account is an account held at a financial institution that allows customers to save their money for short-term and long-term financial goals. It is an account that pays the customer interest based on the amount of money added to the account.
Interest can be the money earned from an investment. When an individual invests money, interest will often be earned in addition to the investment amount. The amount of interest is based on an interest rate. An interest rate is usually in the form of a percentage and shows how much is earned in addition to the starting (initial) amount.
If you open a savings account, you might also set up an automatic deposit at the same time each week or month.
Investing
Investing is like saving, but it involves putting your money somewhere else to try and make more money. An investment is a product that people can buy from a financial institution that may grow in value.
When thinking about investments, it's important to consider the following:
- Security: Is this investment stable or is there potential to lose money?
- Rate or return: What is the total amount of interest earned on the investment?
- Time: How long do I need to keep and/or pay into my investment?
Types of investments
Let’s explore a few different types of investments.
Vocabulary terms
Press the following terms for their definitions.
A GIC (guaranteed investment certificate) is a savings certificate that gains interest and has a set time before you can withdraw your money.
A mutual fund is a type of investment that is shared by many investors.
A TFSA (tax-free savings account) is a government-registered account that allows you to grow your savings tax-free.
Source: TFSA: Top 10 questions and answers. (2019, January 30). National Bank. https://www.nbc.ca/personal/advice/savings-investment/10-clarifications-about-tfsas.html
Explore the following chart outlining various types of investments.
What do you notice about the level of risk and the rate of return for each?
Consider the pros and cons to each type of investment. What stands out to you most?
Record your thoughts using a method of your choice.
Note: These are only a few examples of types of investments. Each financial institution will offer its own investment options and a variety of rates of return.
| Type of investment | Rate of return (interest) | Pros | Cons |
|---|---|---|---|
|
Mutual fund (high risk) |
8% |
|
|
|
GIC (medium risk) |
2.5% |
|
|
|
TFSA (low risk) |
1% |
|
|
Note about TFSA: Some banks offer TFSAs with a range of risk levels. Depending on what you and the financial institution decide is the best for you, you could choose to set up a TFSA with a higher risk and higher rate or return.
Did You Know?
Did You Know?
There are many other types of investments. One example of a very high-risk investment is a stock. Stocks are shares or pieces of a public company that can be bought by an investor. The money the investor makes depends on how that stock performs in the market.
An example of a medium risk investment is a bond. Bonds are loans that investors give to a company or government with the promise of repayment and interest. Bonds usually allow you to get your money back plus interest. Bonds have a lower rate of return than stocks, and you also must keep the money you have invested in a bond for a specific amount of time without taking it out.
Investment risk and timelines
It is important to decide on a timeline when you are setting your financial goal and deciding on an investment.
For a short-term goal, an investment that has low risk may be a good choice. This allows you to make a bit of extra money through interest but keeps your money safe. Examples of low-risk investments include a GIC and a TFSA.
For a mid- to long-term financial goal, an investment that is medium to high risk might work better. With time, the market can rise and fall which means that money can be earned and lost, but there is more time for an investment to grow. A mid-to high-risk investment could mean putting money into a bond, mutual fund, or stock.
Before making any type of investment, it is always important to consider the financial goal and do some research. This could mean speaking to a financial advisor or another type of financial planner, and learning more about what works best for you.
Learner Mehar talks to Teacher Chelsea about a financial goal (part 3):
Teacher Chelsea: Let’s plan how you will earn enough money in six weeks to buy the paint set.
Learner Mehar: I do some yard work and pet sitting for my neighbours. If I save that money each week, I will have enough money to buy it!
Self check
Next, check your understanding with the following true/false questions. Select the correct answer, then press the Check Answer button to see how you did.
What’s the plan?
Teacher Chelsea is planning to adopt a pet and she is planning to save for everything she will need.
After looking at her budget, she decides she can reduce some of her spending and start putting away $50/month.
She starts by putting money in an envelope marked “savings” at the beginning of each month. After a few months, she decides that she wants to change her approach.
Keeping the money in an envelope that she can easily access makes it hard not to spend the money. She also wants to see if she can make a little money by earning interest.
Think and share!
Think about Teacher Chelsea’s goal. Do you think this is a short-term or long-term goal?
What could you share with Teacher Chelsea on what you have learned about investments?
What kind of investments are the lowest risk?
Record your answers using a method of your choice. If possible, share with a partner.