Savings and Investing



Savings and Investing

✓ Savings means safely putting money aside for future use

✓ Savings deposited in financial institutions earns interest and is protected against loss

✓ Investing is using your savings and/income to earn extra income

✓ Investing has two major advantages over savings:

✓ Often yield a higher rate of return

✓ Can grow at or exceed rate on inflation

✓ Investing has two major disadvantages:

✓ The yield is not guaranteed

✓ There is some risk of losing part or all of your money

✓ Smart investors have a combination of both savings and investments

Why People Save

✓ Emergency Needs

✓ Loss of job or family member

✓ Unexpected costs such as cars and appliances

✓ Experts say that every person should have three to six months salary saved in case of emergency

✓ Short and Long Term Goals

✓ Vacations and assets

✓ Security and Future Needs

✓ Children’s education

✓ Retirement

Benefits of Savings Plans

Earnings and Yield

✓ When you deposit money into a savings account, you are lending the bank your money to lend it to others

✓ Bank pays you interest to use your money

✓ When interest is expressed as a percentage of the original investment, it is called the rate of return or yield

✓ Interest rates are usually based on one year time periods

✓ They can be given on other periods such as daily, weekly, monthly

✓ Usually, the more times interest is paid, the greater yield it will return

✓ Simple interest is calculated only on the principal amount

✓ I = Prt

✓ Compound interest is calculated on the principal amount plus any interest already earned

✓ A = P (1 + i)n

✓ Compound interest will earn you the most money in the long run

✓ If you invested $1 a day in a savings plan at 5% interest compounded daily, you would have just over $4700 at the end of 10 years

✓ The higher the yield, usually the higher the risk involved

Safety

✓ Most savings and deposit plans are protected by the Canada Deposit Insurance Corporation (CDIC)

✓ Your financial institution pays for your deposit insurance to hold your money

✓ Your money is automatically insured up to a maximum of $100,000 including principal and interest

✓ If you have money in different institutions, you are insured at $100,000 at every institution

✓ An institution includes all branches of the same place

Liquidity

✓ Liquidity is the rate at which items can be converted to cash

✓ It is important to keep some liquid investments in case of emergency

✓ Some savings accounts require money to be in the account for a minimum period of time

✓ It is important to understand all factors of the account/investment

Savings Plans

✓ Savings plans are designed for people who want to be safe with their money and earn a little interest

✓ Interest may be calculated in different ways:

o Daily paid at the end of each month

o On the average account balance during a specific period

o On the minimum monthly balance, and deposited in your account semi-annually on April 30 and

o October 31

✓ Interest on savings accounts is the lowest rate of interest paid on all types of investments

Term Deposits and GIC’s

✓ Both types of savings plans are where you deposit a fixed sum of money for a specific length of time

✓ Length is usually between 30 days and 5 years

✓ The shorter the term, the greater the deposit required

✓ Term deposits offer a lower rate of interest than GIC’s (guaranteed investment certificates)

✓ Term deposits can usually be liquidated early

✓ Most GIC’s are locked and you would have to pay a penalty to liquidate early

✓ Some GIC’s can be redeemed on the anniversary date of their purchase

Registered Retirement Savings Plans

✓ Introduce in 1957 to encourage people to save for retirement

✓ Allows you to invest a portion of your yearly income without paying income tax

✓ The government will refund you for all taxes that you paid on that income on your tax return

✓ If you withdraw money at any point, you will be taxed on the amount you withdraw

✓ It is a better idea to wait to retirement because your income will be lower and you will pay less tax when you withdraw the money

Registered Education Savings Plan

✓ A tax-sheltered plan designed to help finance post-secondary education

✓ It can only be used if the child goes to a post secondary institution

✓ It does not receive a tax break like the RRSP

✓ However, the government matches a portion of the investment (20%)

✓ There is a maximum amount you can invest based on your income

✓ If the beneficiary does not go to a post secondary institution, you have the following choices:

✓ Transfer up to $50 000 to your RRSP

✓ Withdraw the original amount of contribution without penalty

✓ Withdraw the entire amount and pay your personal tax rate and a 20% penalty

✓ If it is in a family plan, you can transfer the unused amount to another child

Tax Free Savings Plan (TFSA)

✓ Is a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income.

✓ The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP). 

✓ All Canadian residents, aged 18 or older, can contribute to a TFSA.

✓ Investment income earned in a TFSA is tax-free.

✓ Withdrawals from a TFSA are tax-free.

✓ Unused TFSA contribution room is carried forward and accumulates in future years.

✓ Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.

✓ Choose from a wide range of investment options such as mutual funds, Guaranteed Investment Certificates (GICs) and bonds.

✓ Contributions are not tax-deductible.

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