We all know we should save, right?
If you’re like me, then you’ve probably heard phrases like “make sure to save at least 10 percent of your income” or “save for retirement” from someone in your life.
I used to think if I just put my money into my bank account and kept it there, I was saving and everything would be just fine. Boy (or girl), was I wrong! What I should have been doing was investing my money instead.
What’s the difference?
SAVING vs. INVESTING
Saving implies you are holding on to your money to make sure it’s always there. As a simple analogy, think of a squirrel gathering nuts for winter – if Mr. Squirrel gathers 50 nuts, he will have 50 nuts when he’s ready to dig them up.
Investing also involves saving your money, but with the intention of growing it. Can you imagine how excited Mr. Squirrel would be if he gathered 50 nuts but has 75 when he retrieves them?
WHY SHOULD YOU INVEST?
There are two main reasons to invest rather than save.
The first reason is that the cost of living goes up every year.
Think back to 5 years ago – what was the price of bread back then compared to the price of bread now? Here are the expected food price increases in 2018, prepared by Dalhousie University and University of Guelph:
This rising cost of living is called inflation, and on average, it goes up by 2 to 3 percent every year. If your money doesn’t grow to at least keep up with inflation, then you won’t have the same purchasing power in years to come – you’re actually losing money!
You can use this Bank of Canada calculator to see how much you would need in today’s dollars to have the equivalent of $100 in previous years.
The second reason to invest is so you don’t have to work forever!
Many of us think of retirement in terms of a certain age, but I urge you to think of retirement as the point in your life at which you have enough money to cover your lifestyle, without working. As business owners, we expect that we will get paid from our business without having to physically do any of the day-to-day duties.
If your money doesn’t grow enough to sustain you in later years, then more than likely you will have to continue working to afford goods and services. In this case, you should aim to grow your money at a rate that is higher than inflation, to build up that “nest egg”.
The following graph shows how much you would need to save per month and invest it at a rate of 8% growth to have $1M at retirement. The numbers on the left indicate the number of years left until your retirement age.
E.g. Looking at the top of the graph, someone who aims to retire in 40 years will need to save $286.45 each month and invest it at 8%. Looking at the bottom of the graph, someone who is 5 years away from retirement will have to save $13,609.73 each month and invest it at 8% to get to the same goal of $1M.
SO HOW DO YOU START INVESTING?
It’s great to see your money growing, however you must remember that investing does come with some risk. Choosing the right investment for you depends on your goals, the length of time you would like to stay invested, and the type of investor you are.
Someone who is very young may have a longer period of time to invest and may therefore be willing to take a bit more risk to get more growth. Someone who is closer to retirement may be focused more on safety and may choose a conservative investment.
Having an advisor guide you through the process can give you a good indication of the type of investor you are and the best way to plan for your money goals.
Kim Lowrie is an insurance agent and mutual fund representative with World Financial Group.
She and her husband have made it their lifelong mission to help families, individuals and business owners succeed financially.
To find a solution that best fits your needs and goals, connect with Kim: