The Not So Savings Account

When I was 16 I had $5,000 in my bank account which I’d earned working full time in the summers at a property management company reporting repairs that tenants required. At the time interest rates were about 2% on a savings account. Frankly speaking, a savings account is just a storage space for your money, when you need it fairly quickly. Had I understood a little bit more about finance, I may have sat down and thought of where my money could work harder for me.

When you should lock your savings into an investment

Like most 16 year old, I didn’t have many expenses. I was living at home and spending my money primarily on entertainment, and eating out. Now that I think of it not much has changed, but that’s beside side the point. I had $5,000 of liquid funds that I likely would not need in the near term, having money coming in from a job each summer. It was at that time that I should have evaluated how much of my saving account I might need over a reasonable time horizon. I could have easily put away $3,000 toward an investment for a few years.

When will you buy your next big ticket item? A car, a down payment on a home, and a capital investment for your business are just some examples of times when you might need cash quickly. The first step in your personal investing strategy is deciding when you will need your money and how much of it you can set aside for different purposes. You may quickly find that you have too much money in one source or another, and can earn more investment income by allocating your wealth more strategically.

Types of investments and their time horizons

Type of Investment Annual Expected Return % (Mar 2014) Time Horizon What my $3000 is worth after 3 years
Bank Savings Account 0.1% to 0.5% Liquid assets $3,022.55
Treasury Bills Around 1% 3-6-12 months $3,090.90
Short Term GIC 0.5% to 0.8% 30 days to 1 year $3,072.58
Long Term GIC 0.9% to 2% 1 to 7 years $3,100.09
Mutual Fund 10 Year Average 5.85% (BMO NA Equity) Liquid assets $3,557.90
Lend for Mortgage Transaction 5% – 10% 1 – 5 years typically $3,573.05
Stock Market Index Fund 14.6% (Last 12 months) Liquid assets $4,515.18

There are many types of investments which can earn you all different types of returns and force you to bear different levels of risk. Be careful to take your time in deciding what is best for you, but as you can see, you can do a lot better than a savings account at the bank!

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