Download 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.