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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