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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.