Today, we are going to discuss the concepts of saving and investing. Saving and investing are ways to accumulate wealth for the future whether it be for retirement or to buy a house. Everyone is going to have different opinions about each concept, but I am going to provide my take on it.
Compared to investing, saving has lower risk and provides lower returns. I view saving as a short-term method to accumulate wealth. You want to save instead of investing when you cannot afford to lose the principal and need the cash at any time. Such instances include saving for a home down payment, emergency fund, or a new car. Compared to decades ago, saving is no longer as attractive as it once was. Interest rates are at an all-time low. Saving accounts interest rates hover between 0.5%-1%. That is below our country’s targeted inflation rate of 2%. Even my “high interest” savings account with EQ Bank is only 1.5% (down from 2.45% earlier this year). Because the inflation rate is greater than the savings interest rate, the purchasing power of your savings is actually decreasing each year. That being said, savings accounts provide greater liquidity (access to cash) which makes it the better option during unforeseen events.
Investing is higher risk but can provide higher returns. Investing can come in multiple forms such as stocks, bonds, real estate, and many more. I view investing as a long-term method to accumulate wealth. When investing, you should be looking at long-term goals of 5, 10, 15+ years. With the low interest rate environment and high stock market growth (despite COVID19), investing is looking like the more attractive option. As young adults, we will most likely look to invest in stocks and bonds. Compared to real estate, stocks and bonds give us a lower barrier to entry. Investing platforms can also be easily setup through your bank or online brokerage firms like Questrade.
When buying stocks or bonds, I suggest that people look at index tracking ETFs and bonds. ETFs are investment funds that trade like stocks but track a variety of metrics such as an entire index or sector instead of one individual company. By doing so, you can reap the benefits of diversification like we discussed last week. Unless well-educated and experienced at finance, young adults should not day trade or stock pick. You need to know the difference between investing and speculating. Just looking at the stock price on Yahoo Finance is not investing but speculating. You are hoping that the stock price goes up after you buy it. Investing involves looking at the company financials, news, and even management team. It is a lot of work with is why I suggest looking at broad market/sector ETFs and bonds when starting out.
Ultimately, do what you feel is comfortable. Assess your goals and your risk tolerance. If you plan to invest, please do your research. While I am happy with the small stock portfolio that I have built up over the past 2 years, I did make mistakes. My biggest mistake was buying $3,000 worth of stock for Company “A” because of hype and speculation. After one year, my investment shrunk to $1,000 and I netted a realized loss of $2,000. Thankfully I got out because that same investment is only worth $400 today. I stress the importance of DOING RESEARCH and AVOIDING HYPE and SPECULATION. Don’t invest in a stock just because your friends or peers say so. There is no such thing as making quick, sustainable money.
Next week, I will continue with the credit card review series.