For most of us, our first savings experience includes a piggy bank. As we get older and start to join the workforce, we turn to a savings account to watch our money slowly grow. At this point in our lives, the reliability of a savings account or other short-term savings vehicle like guaranteed investment certificates (GICs) offers us the opportunity to learn how to save and budget properly, without having to worry about risk.

But what if you’ve moved beyond short-term savings goals (like a vacation) and are working up to bigger purchases or longer-term goals, such as buying a home, going back to school or retiring? The savings account you’re used to may be secured, but after the effects of inflation, the returns you get are close to zero.

When you start to evaluate long-term financial goals as part of your plan, time is on your side allowing your savings to compound for long uninterrupted periods of time. If this is the case, you may want to consider investing as an option. If you are ready to grow out of your savings account, the change is not as difficult as you may think.

Do I have enough money to transition from a savings account to an investment account?

Some people have preconceived notions on how much money they need to start investing. Do you really need a large sum like $1000 or $10,000 to get started? The answer is, no. If you have been contributing to a savings account, then you likely have enough money to make the transition to investing, with some investing platforms only requiring an initial investment of $100.

What is the difference between saving and investing?

When you keep your money in a savings account, you earn a low interest rate on it, but your money is guaranteed and it’s there when you need it. With investing, the sooner you start, the more time your money has to grow before you eventually need it sometime in the future. Markets do fluctuate but time allows you to ride the ups and downs and experience greater returns—this is the law of compound interest. Over time, the ups and downs of your diversified portfolio should move in one direction: up.

Let’s take a look at the difference that time and higher potential returns have on your contributions. Say you start with $100 now and contribute $25 a month for the next 10 years, you could either put that money in a:

• Savings account. Here, you can expect to earn an average annual interest rate of 0.10%. In 10 years, you would have roughly $3,115.86 (future value).
• Mutual funds. Invested in a balanced typed mutual fund, with an assumed average annual compound return of 6%, you would have $4,278.92 (future value) in 10 years.

Am I willing to take on the associated risks of investing?

While investing can be daunting, it is important to remember that time and risk work hand-in-hand for longer term goals. How you save and invest should always be dictated by your willingness and ability to take on risk. Being highly sensitive or reactive to dips in the value of your investments will help determine how much volatility you can accommodate in your portfolio. However, the greater the potential for growth usually comes with a greater amount of volatility for the value of your investments. The most successful approach to investing is having patience and a long-term vision that allows you to remain focused on your ultimate objectives.

If your time horizon is relatively short and you need a guaranteed principal, a savings type account is the better choice. Alternatively, if you can tolerate more volatility and have a longer time horizon to ride out market turbulence, a portfolio with diversified stocks will put your money to work for you.

Investing doesn’t need to be scary or complicated, in fact it is an important way to start working towards a better financial future and long-term goals. If you’re interested in learning more about investing and what options are best for you, call our Wealth Advice Centre at 1-855-541-4387. Our advisors are here to help guide you through your investing journey and find a solution that suits your needs.