Your Savings Options
Not all savings accounts are created equal. Some offer you unlimited access to your money in exchange for a monthly fee, while others charge you nothing provided you leave your money where you put it. The type of account you choose really depends on you. Consider:
- Your overall financial goals
- How much money you can deposit
- How long you can go without withdrawing money
The Different Options
This account allows you the most flexibility, but offers the lowest interest rates. The benefit of using this type of account is that you can access your money at any time.
High interest savings account (HISA)
Usually, a high interest savings account will offer you a higher interest rate than a traditional account will. Some require that you keep a minimum amount of money in the account, while limiting the number of free transactions you can make.
Tax-free savings account (TFSA)
As a registered savings vehicle, a tax-free savings account allows you to invest up to $5000 per calendar year without having to pay income tax on the interest you earn when you make a withdrawal.
Registered retired savings plan (RRSP)
To motivate Canadians to set aside money for retirement, the government offers tax deductions on contributions made to your RRSPs. When tax time comes, your taxable income is reduced by the amount that you had contributed. Keep in mind that the government will tax you when you withdraw this money, however you will likely be in a low income tax bracket as a newly retired 60-something year old.
Registered Education Savings Plan (RESP)
If you’re saving for your child’s education, you may want to consider using an RESP, rather than a traditional savings account. The government offers additional benefits when you deposit money into an RESP such as the Canada Education Savings Grant (CESG or the Canada Learning Bond (CLB) – both options are free money.
Youth Savings Account
Start your child’s savings off young and they’ll likely have a better grasp on their finances as they grow up. Many financial institutions offer accounts without transaction fees and other fun incentives.
Bonds are loans, but unlike other loans, you’re the lender, since you’re the one purchasing the bond. The issuer of the bond, or borrower, is usually a big company or the government. They borrow your money in order to lend it to other companies or to use it as needed. The bond issuer pays periodic interest to you, the lender, and then returns the borrowed money at a set date in the future.
Pieces of a company are often referred to as equities, or stocks. There are two types of stocks: preferred and common shares. When you buy stocks, you are basically buying shares in a company, meaning that you are part owner of that company. When the company profits, the shareholders profit. Likewise, if the company suffers financial loss, so do you.
A mutual fund is a managed product that pools money from many different investors to purchase a portfolio of investments that can be made up of t-bills, stocks, bonds and/or equities. Mutual funds are definitely not for everyone as they are deemed to be a riskier investment, fluctuating in value depending on current market conditions, both at home and abroad.
Although they can seem a little scary to a new investor, there are a lot of advantages to purchasing a mutual fund. They are professionally managed, they provide you with diversification that would otherwise be very expensive to do on your own (mutual funds can hold anywhere between 50-100 different investments, you try buying all of those on your own!), they are cashable at any time and may provide you with some savings at tax time too.
There are some disadvantages as well, the professional management does come with a fee (sometimes transaction fees, management fees or loads), there is no insurance available for mutual funds and of course the obvious – fluctuate in value, meaning you can actually lose money on them.
If you are a fist timer, visit a branch and speak to a mutual fund representative to help you chose an appropriate fund specific to your risk tolerance.
Market Linked GICs
This is a happy medium between a GIC and a mutual fund. Just like a GIC, your principal is protected so no need to worry about losing money on this product. However, the return (or interest) that you will receive at the end of the term is to be determined.
The market growth GICs performance is “linked” to the performance of the underlying equity market/index that it is following. So for example, if you have a market linked GIC that is following the S&P/TSX index which increases by 8% over the term of your GIC, your return is 8%! However, if the index falls by 20% you do not lose 20%, your return is 0% and you are given your principal investment back.
A market linked GIC could be a great addition to your portfolio! To find out more, visit your branch and speak to a financial services representative.