Saving vs Investing

**Seeker** · 07-26-2009, 10:25 PM

Originally posted by seen View Post

Hi all,

I've been an observer for a little while, but decided to post this today. I have a general question for all of you, because I can relate with you on many points, yet be a full 180 on others.

I've been saving for as long as I can remember. When I was around 8 or so and started getting an allowance, I remember pooling my money together for the video game I wanted. When I finally got there, I realized I didn't want it anymore. From then on, I always set saving goals for myself: PC, laptop, TV, car, etc.. I eventually discovered it was more rewarding knowing that I could buy something, rather than to actually get it.

Here is my dilemma:

I guess you could say that my EF (only learned that term after visiting this site

) is roughly 15 years.. I have a small RRSP, but my money is basically tied up in CD's. No stock, investments, IRAs, etc.. I have no real inclination to do so either, but I figure since I'm still pretty young it's not too late.

I'm not a fan of risk that I have no direct control over. The thought of losing money on an investment no matter what it is (especially with the economy the way it is now, I realize I can minimize that effect and/or profit by researching/rotating investments, investing more per month, etc.. but that requires more work than I care to do) is not appealing to me. I like being able to just track what I've accumulated, knowing that if an emergency comes up I can pay it outright and not have to worry about any penalizations.

It seems like every post here refers not only to the saving aspect but the investment aspect as well. I constantly see feedback regarding "changing" the habits of spenders, setting boundaries for them and whatnot; do I need to do the same? Or rather, should I be?

Hi "seen".... you sound like a younger me.

When I first started working, I too "saved" and never really "invested." Loss is something I didn't really want to deal with, but I came to the realization that "saving" in this matter (through CDs) IS a loss.

Even though you earn interest, you lose money in terms of inflation and taxes. So in the long run, saving in CDs, is not exactly the most beneficial either.

This article explains the above comments:

Invest FAQ: Financial Planning: Saving versus Investing

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15 years' worth of savings in an Emergency Fund is not a great method for long-term growth unless you have a goal for that money (like a home purchase or down payment). What are your financial goals? Without knowing that, nobody can advise you.

Does your workplace have any type of 401k plan? If that is so, then everyone will advise you to invest to the company match and even more depending on how far along your are in meeting whatever financial goals you have. The many venues of workplace retirement savings can be done on a pre-tax basis, which means that you do not pay taxes on that money (which gives you an immediate tax savings), and you freely "get" a company "match" (which doubles the money invested). You just need to choose from their offerings. If workplace employment ends, you transfer it to another IRA where you can watch it.

Depending on your age, and the kind of standard of living you want to achieve before retiring, youth is the time to start.

**Seeker** · 07-26-2009, 10:39 PM

Hmmm. just read up on RRSP. You're in Canada and that appears to be a sort of Retirement or tax benefit of setting money aside. And I have no idea what the limits are in your country or if it's enough to meet your goals.

What you should do depends on goals.

Your country operates very differently from America in the sense that when we plan for retirement, we have to plan additionally for failing health and the expenses of that can be daunting.

**disneysteve** · 07-27-2009, 05:12 AM

Originally posted by seen View Post

I'm not a fan of risk that I have no direct control over.

Welcome.

I think it is important to recognize and understand, as Seeker pointed out, that even "safe" investments like CDs have risk associated with them. You and I have no control over any of it. We can't control what the stock market does but we also can't control interest rates or inflation either.

Stocks have market risk, meaning their value could rise or fall based on market conditions.

CDs have inflation risk, meaning that your return may not keep up with inflation so the buying power of your money decreases over time. Let's say your CD is paying 2.5%. If inflation is 3% and your interest is taxed at 25% (I don't know how that works in Canada), you actually end up losing 0.75% each year in real dollar terms.

You need equity investments to keep ahead of inflation.

**seen** · 08-03-2009, 02:07 PM

I appreciate the advice, and will definitely have to research this a bit more. Do you guys check your portfolios daily? Will I end up being one of those subway people who reads the newspaper daily for stock quotes, etc. then curse and bang my head against the wall when they fall short?

On a separate note, I'm Canadian but I'm currently working in the US so I have accounts in both countries. Financial goals? I don't really have any.. I do know that I want to buy a home at some point but I'm not sure how much towards that I want to put away either.

I'm a saving mess

**elessar78** · 08-03-2009, 02:23 PM

Two of my financial role models (step dad and father in law) have no money invested in stocks. Both are mega-savers. One was an economist for a major international org and the other is a farmer (how can two people have more different life paths come to the same conclusion about money??) I don't think either will want for money when retirement comes.

One has a pension and health benefits through work and the other just has a savings account and CDs.

The economist once told me that while he was working, he met so many investment banker types picking his brain for information about something they wanted to buy equity in. His conclusion: they don't have a clue what they're doing. Good thing he has a pension.

**zetta** · 08-03-2009, 03:29 PM

The economist once told me that while he was working, he met so many investment banker types picking his brain for information about something they wanted to buy equity in. His conclusion: they don't have a clue what they're doing. Good thing he has a pension.

Unfortunately, pension funds are also run by investment banker types. If the people investing the pension money screw up, he could lose out (or the taxpayers could have to bail his pension fund out.)

**elessar78** · 08-03-2009, 05:18 PM

Originally posted by zetta View Post

Unfortunately, pension funds are also run by investment banker types. If the people investing the pension money screw up, he could lose out (or the taxpayers could have to bail his pension fund out.)

Good point, but since it's not his money in the pension he still has his own money in reserve. I'm not knocking investing into retirement accounts, I do it myself. I'm just saying that while investing seems to be the most popular way to fund retirement, it's not the only way.

**snafu** · 08-03-2009, 07:24 PM

There is no point in taking risks if it gives you sleepless nights. Many of us manage Risk by splitting retained earnings into several sections. If you file Canadian tax, you are entitled to RRSP deductions whose allowable sums are detailed on your Notice of Assessment. Any sums rebated by CRA become the basis for the subsequent RRSP contribution.

If you work for an American firm, see your HR representative for details of their program. Since you are RISK adverse and wish for CONTROL you might feel better continuing to keep all sums in savings accounts. That isn't Investing and others have pointed out you are likely lose to inflation. If your goal is to grow your retained earnings, start with baby steps.

An oft used generalization is 100 minus your age. If you are 25 y/o, 25% of retained earnings would be held in some type of Bond/CD/Savings instrument & 75% held in a split of Equities. Open a DCA account with Vanguard. That means Dollar Cost Averaging. You will be buying variable numbers of units each month but the sum paid each month stays the same. Minimum opening balance...perhaps $ 1,000. and $ 200. each month to start. The cost of the units will fluctuate each month depending on market conditions but over a ten year period you will likely increase your investment substantially. I can't say the same for a Saving a/c or bond or CD.

Have you read that Yellow/Black jacked "Investing for Dummies" [from the series] or "Wealthy Barber"? You might feel better about these ideas if you had a better understanding of how it all works.

**conancare** · 08-04-2009, 10:36 PM

Hi Everybody,

What ever may be the investment but don't you think that investing on long term investments is better then short term investments. Which tends to be less risky and better returns.

Regards,
conancare

Saving vs Investing