I see lots of comments about not leaving money sitting in your chequing account. People say put it into TFSA, RRSP, crypto or a bunch of other places. Is there anything wrong with people getting their paycheque deposited and just leaving it in their account? Pay the bills, do some spending, follow a budget and do no investing or use a savings account whatsoever?
I wouldn’t go so far as to say leaving money in your bank account, if there is any left over after paying your bills, is wrong. Many people in our society work hard to get by, living paycheque to paycheque. In those situations it’s hard enough to get by and keep up with the bills. There isn’t much benefit in thinking about what else money might be used for when all the money is already being used for things you need.
Assuming you have any money left over after the necessities are covered, leaving some money in the bank for emergencies or, as some people say, “for a rainy day,” is a good idea. It’s sensible to make sure you have an emergency fund. A person might suddenly have their car break down, lose their job, or fall ill. Having enough money saved in the bank to live off of for three months is a good plan.
Let’s say though that you are making enough money to cover your essentials and bills. Let’s assume for a moment that you’ve got enough money in the bank to live off of for a few months if you needed it. At this point, when your bills are paid and you’re not in debt, and you’ve got a financial cushion to handle emergencies, that’s when most advisors will recommend looking at things to do with your money. This is when it makes sense to make use of things like investments, tax free savings accounts (TFSAs), and registered retirement savings plans (RRSPs).
Why do people recommend investing your left over money rather than leaving it in a chequing account? There are a handful of reasons, but it basically comes down two two things.
First, investing money makes you money. Having a bunch of money you’re not using and probably won’t need just sitting in a chequing account doesn’t accomplish anything. The money, above what you’d need for short-term emergencies, isn’t offering any practical benefit if it just sits in your bank account. This money could be put to use making you more money – money you might want some day for a down payment on a house or for retirement. Let’s look at some numbers.
If you put $100 per month you don’t need for anything else into a chequing account and do that for 30 years, at the end of the 30 years you’d have saved $36,000. Which is nice, it’s a good chunk of change. Now, if you put that same $100 per month into a conservative retirement investment account which returned 5% interest each year, you’d have $83,000 at the end of 30 years.
Investing the money, even in a low-risk, low-gain fund doubles your money in 30 years. There isn’t anything wrong with the first option – saving $36,000. But wouldn’t it be nicer to have $83,000? There’s virtually no extra work involved and, with the right investments, minimal risk, so why wouldn’t a person want to invest their money?
The second reason people recommend investing money you don’t need in the short-term is that the value of money goes down over time. In our society money gradually loses value due to a phenomenon called inflation. Basically this means every year your money is worth slightly less than it was worth the year before. A side effect of this is prices slowly rise over time. The milk you bought for $2.00 last year costs $2.10 the next year. The house you purchased for $150,000 costs $250,000 in ten years.
Since the value of money slowly decreases over time this means the $10,000 you have in your chequing account now is worth $9,980 next year. In 30 years it’ll probably lose half its value and be worth around $5,000. Investing helps balance this loss of value which happens due to inflation.
As I mentioned before, investing money helps increase your wealth over time. This growth in funds helps counteract the loss of money’s value. Most investments grow in value a bit faster than inflation erodes your money’s value, helping you keep more of your hard-earned dollars.
I won’t pretend investing is always a great idea. If you don’t have a cushion in your bank account to handle emergencies then it’s not a good idea to invest. Also, it’s possible for investments (especially risky ones) to drop in value. However, if you have any spare money in your bank, it’s almost always better to invest it cautiously than to leave it sitting and slowly rotting away its value in your chequing account.
If you’re worried about the money being lost in the stock market there are investment products which are guaranteed to pay out a small amount at a set time, whether the stock market goes up or down. These investments are called guaranteed investment certificates (GICs) and will pay you a fixed amount of money at a specific time, usually three to five years in the future. This safeguards your money against a stock market drop while also generating additional funds to offset the effect of inflation.
There are other safe ways to help guard against inflation without locking your money away in an investment or GIC. Many banks and credit unions offer high interest savings accounts (HISAs) where you can store you money and retrieve it whenever you need funds. Each month the money stays in the HISA it generates a small amount of interest, which will often keep up with the rate of inflation.
All of these options can seem overwhelming, causing some people to pull back from the choices. A financial advisor at your bank can offer suggestions on how best to allocate your money so it works for you and retains its value. Working with them you should be able to find an option that puts your money to work for you without offering more risk than you are comfortable handling.
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