Saving vs. investing: Which is right for you?

Have you ever confused saving with investing? This is an understandable mistake, as they are often used interchangeably in casual conversation. Both saving and investing involve setting aside money for the future, just in different ways. However, it’s important to understand the differences between the two to make informed financial decisions, set goals, and manage risk effectively.

Both saving and investing play important roles in personal finance, and a holistic financial plan often incorporates both strategies. Here are the key differences between the two:

*for illustrative purposes*

Compared to traditional savings accounts, investments have the potential to offer higher rates of return. Even though individual markets can have different and sometimes unpredictable performances each year, the S&P 500, a collection of 500 large companies in the United States, has historically grown by around 10.15% historically grown by around 10.15% each year .

If you buy individual stocks worth $1,000 in the S&P 500 and it grows by 10.15% in a year, your investment would be worth $1,115.50 at the end of the year.

However, remember that past performance doesn't guarantee future results, so be cautious and do your research when investing.

Time Horizon: Saving is designed for short-term needs, and funds are expected to be accessed within a relatively short time frame. Investing typically has a longer time horizon, often spanning years or decades, to benefit from the magic of compounding and potentially higher returns.

By starting early and consistently contributing to investing accounts, such as Tax-Free Savings Accounts (TFSAs) or Registered Retirement Savings Plans (RRSPs), you can take advantage of time and compounding to build a substantial nest egg for your goals. 

Accessibility: Savings are generally easily accessible and liquid, allowing for quick withdrawals when needed. Investments are typically less liquid, so it’s best to plan investment withdrawals ahead of time. 

Risk Profile: If you're anxious about investing, you're not alone. Saving is typically attractive for individuals with low risk tolerance because investing involves assuming higher risk, as investments can fluctuate in value, and there is a possibility of losing some or all of the invested capital. 

However, even with a low risk profile, there are still ways to invest. Through avenues like Questwealth Portfolios , you can be matched with an ETF portfolio that is managed for you and suits your risk profile and financial goals. 

To set yourself up for a secure future, engaging in saving and investing is crucial.

The Financial Consumer Agency of Canada suggests you set aside three to six months of living expenses in savings before investing. If you don't have an emergency fund yet, prioritize saving and start investing what you can once you have a buffer in place. 

How much money you allocate to savings and investments depends on your income, age, risk tolerance, financial goals, and existing savings or investments. Understanding your financial position will help you make informed decisions about how much you can put in each. 

How much money you allocate to savings and investments depends on your income, age, risk tolerance, financial goals, and existing savings or investments. Understanding your financial position will help you make informed decisions about how much you can put in each. 

Remember that both saving and investing work in tandem to benefit you. As you allocate funds to savings accounts, such as a high-interest savings account, and investing accounts like the First Home Savings Account (FHSA), you take a proactive step toward building a stronger financial foundation and seeing your money grow over time. 

Note: The information in this blog is for information purposes only and should not be used or construed as financial, investment, or tax advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.