What’s the difference between saving and investing?

We all have money goals we're working towards, whether it's building a safety net, travelling to a dream destination, or retiring comfortably someday. Saving and investing are the strategies that can help us reach those goals.

While they both involve setting money aside, they aren't the same. One major difference? Savings accounts are expected to pay interest and provide growth at little to no risk of loss. Investments come with varying levels of risk of loss, depending on the type of investment, although investors are typically seeking higher potential returns than they might get in a standard savings account. The two work well in tandem, and in many cases, it makes sense to incorporate both strategies when planning your finances. 

Let's take a closer look at some of the other key differences, so you have a better idea of what to do with your money — when to save it and when to invest it — to make your goals a reality.

What is saving?

Sure, you can stash cash under your mattress, which technically counts as saving. But is it the best way to save money or the safest? Not necessarily. Smart saving means putting your money, for example, into a savings account with a bank where you can earn some interest and have peace of mind knowing your eligible deposits are covered by insurance.*

A typical savings account can be a good idea for your shorter-term goals because you'll be able to access the funds easily when needed in a few months or years. You could save money for a new car, a down payment for a house, or an emergency fund to cover unexpected costs (like when said new car gets a flat tire.) 

Once you know what you're saving for, you can start small and get into the habit of setting aside money regularly, which is better than taking a "save-when-I-can" approach. By budgeting and saving money consistently, you'll see that even small amounts add up over time. Then, you can feel good about having enough money in the bank and avoid racking up high-interest debt on your credit card or line of credit. 

*CIDC insurance covers eligible deposits of up to $100,000

The benefits of saving your hard-earned money

You earn interest. Although the interest you earn in a savings account might be modest, it still beats keeping your money in a piggy bank or chequing account. With a savings account, you know the exact interest rate you're getting and can count on a reliable return on your deposits. Then, as you earn interest, you'll earn more interest on that interest, and so on, to help your savings grow (that's the power of compounding!) 

Your money is accessible. In a non-registered savings account, your cash is liquid, meaning you can take it out anytime (with the exception of locked-in investments, like GICs.) Ideally, you don't touch your savings and only dip into them when you need to. But when needed, you can conveniently access all the money you put in, plus any interest earned. 

You get peace of mind from CDIC insurance coverage. Want to park your money somewhere safe and sound? As long as you save with a bank that's a member of the CDIC (Canada Deposit Insurance Corporation), your deposits up to $100,000 are covered by CDIC Insurance. 

It's low risk. If you're more risk-averse, saving is an appealing strategy, because there's little to no potential to lose money. 

It's easy. Saving is pretty straightforward and is something most people, even at a young age, can do without much help. The only real effort you have to put in is remembering to save regularly, but banks can offer tools to make this part easier. For example, at Tangerine, you can set up an Automatic Savings Program (ASP) to automatically move money to your savings at a frequency that works for you (daily, weekly, bi-weekly, monthly). So, you can save without even thinking about it. 

No-fee options. You don't have to put up with fees that eat away at your hard-earned savings. Explore your options and find a bank account that doesn't come with fees or require you to maintain a minimum balance.

The big drawback of savings: low earning potential

As great as saving is, it's not a perfect strategy on its own, especially if your goal is to build wealth. 

Savings accounts typically come with low interest rates. As the cost of living increases (have you noticed how everything gets a little more expensive every year?), the interest you earn in a savings account often can't keep up. When your savings don't grow at the same rate as prices rise, your money loses its purchasing power over time (the same amount of money will buy you less). When you're saving for the short term, it's not that big of a deal, but in the long term, it can have a big impact on your money. 

This is where investing comes in.

What is investing? 

Although there are short- and medium-term investments, many people think of investing in terms of a multiple-year timeframe. For example, when you have money you want to set aside for your retirement more than five years ahead, putting it in a long-term investment could offer you the opportunity to earn higher returns than having it sit in a savings account.

Investing involves using your money to buy investment products, such as GICs, mutual funds and exchange-traded funds (ETFs). You can choose to purchase your investments in a registered account, like a Retirement Savings Plan (RSP) or Tax-Free Savings Account (TFSA), which have certain restrictions, including annual contribution limits, but offer advantageous tax benefits. Or you can purchase these investments in a non-registered account, which has no contribution limits and is easier to withdraw from, but offers no tax benefits.

When you invest, you might be taking on some risk because your returns aren't always guaranteed. That's why it's so important to think of investing as something you're in for the long haul. The longer you leave your money invested, the more time it has to offset the risks and potentially increase in value.

The benefits of investing 

There's the potential to grow your money. Yes, it's true that your returns can fluctuate. But depending on the investment products you own and how long you hold on to them (remember, this is key!), generally, you might earn more than you would from interest in a savings account. 

It helps you reach your financial goals. Investing helps support your big financial goals, like retirement. When you invest, your investment mix can be tailored to you based on your objectives, time horizon and risk tolerance. You can even get portfolios that align with your preferences, like paying fewer/smaller fees or choosing socially responsible investments. 

It's more accessible than ever before. Think investing is only for savvy investors with lots of coin in the bank? Think again. While there's a little bit more of a learning curve than with saving, investing your money doesn't have to be complicated. There are many more ways these days for novices to get started with an investment account.

You can automate your investing. Just like you can automate your savings contributions, you can do the same with your investments. By setting up pre-authorized contributions, you can automatically move money into your investment account on an ongoing basis. It saves time and, even better, takes the guesswork out of when to invest. This approach prevents emotions from affecting how much you contribute and keeps you investing consistently, no matter what's happening in the market. This is called dollar-cost averaging, and it allows you to buy more units when prices are low and fewer units when prices are high, because you're adding a fixed amount of money to your investment account each month.

The downsides of investing

There are more fees: Compared to savings accounts, which typically have minimal or no fees, you'll potentially pay more to invest your money. Fees vary depending on your investment portfolio and institution. They cover costs such as the administration, operation and management of funds. Common fees for investment funds include management fees and trailer fees, which are used to determine what's called a Management Expense Ratio (MER), which is an ongoing cost of investing. You might also pay fees when you buy or sell an investment. While you can't avoid the fees, it's important to understand what you're paying because it can impact your rate of return. Higher fees may cut into your returns, reducing the amount of growth. Pay close attention to the total cost of your investments and your rate of return so you're not in a position where you're paying more in fees than you're actually earning. It's worth doing some research to find low-cost options, such as ETFs, that may help you keep more of your money.

It can be risky: There's no way to sugar-coat the risks you take when you invest. The reality is the market is unpredictable, and the value of your investments can fluctuate. Depending on the underlying investments, your returns aren't guaranteed, and there's a possibility you could lose money. However, there are ways you can manage your risks, like having a well-diversified portfolio.

Be prepared to ride out the ups and downs of the financial markets, and remember to keep your goals in sight. When you stick to your plan and invest for the long run, short-term fluctuations aren't as big of a risk. 

Another way to reduce your risk is to diversify your investments. So, instead of picking one stock and hoping it does well, you could have a diversified portfolio with investments across different markets, industries, and asset classes. Why is this important? Because your dollars are spread across these different investments, and if one isn't doing well, you still have others that could be performing better, which limits your losses.

Registered accounts for saving and investing

Tax-Free Savings Account (TFSA) – Take advantage of tax-free growth for your savings or investments. You're not taxed when you put money in or take it out of your account as long as you stay within your contribution limits. 

Retirement Savings Plan (RSP) – An RSP (also known as an RRSP) lets you save or invest for your retirement while enjoying tax benefits, like reducing your taxable income every year you contribute, so you could potentially pay less in income tax. You also defer paying tax on any growth in your RSP until it's time to withdraw the money, usually once you're retired. 

Retirement Income Fund (RIF) – When it's time to finally use the savings you've been tucking away for retirement, you can convert your RSP to an RIF. A RIF (also known as an RRIF) is designed to help you manage your finances easily by offering a way to withdraw income from your savings while you're retired. (Keep in mind that you must convert your RSP into a RIF in the year you turn 71.)

When to save and when to invest?

The answer will be different for everyone, since it depends on your current financial needs and future goals. Here are some things for you to consider.

• Don't have an emergency fund yet? Start one ASAP. Experts suggest setting aside enough money to cover at least three to six months' expenses to keep you afloat in case of financial challenges. You'll want your money somewhere safe and accessible, so an emergency savings account is ideal. 
  
• If you have a goal to go on vacation or make a big purchase within a few years, it's also best to use a savings account. Investing may be too risky for goals with shorter timelines because your investment may not have enough time to recover from any potential market downturns.
  
• On the other hand, taking some risk could be worth the reward for your bigger, far-away goals, like retirement. Investing your money for the long term may produce higher growth.
  

As you can probably tell, there's a time and place for both strategies on your financial journey. Saving and investing aren't the same. But they're both equally important, and they can help you reach your financial goals in the short term and the future.