As you set out on your journey to begin saving and investing to meet your financial goals, you’ll need to determine which products and/or investment strategies are right for you and your financial situation.
To determine the most appropriate savings and investing options, begin by asking yourself these three key questions:
- What are you saving or investing for?
- What is your time horizon to reach your goal?
- What is your risk tolerance?
Did you know?
An RRSP and TFSA are investment vehicles, while GICs and mutual funds are investment products you hold within these vehicles.
The following is a brief, high-level guide to get you started on choosing which investment options align with your goals and timelines:
Your risk tolerance – a key factor in determining how you’ll invest your money
Your risk tolerance, or risk appetite, is the amount of risk you’re willing to accept when investing and your financial ability to handle loss. Having a clear understanding of your risk tolerance will help you determine which investments are appropriate and which to avoid.
Many investments offer the potential for a higher rate of return but also involve some level of risk. More risk may be acceptable if your financial goal is longer term, which will allow for more time to recover any financial losses.
Your Scotiabank advisor can help assess your risk tolerance and build an investment plan tailored to address your unique needs and comfort level.
Basics of saving and investing offerings – frequently asked questions
High-Interest Savings Accounts (HISAs) vs, Guaranteed Investment Certificates (GICs)
What are they?
HISAs usually earn more than a typical savings account, helping you increase your savings over time. How much interest you earn depends on the financial institution, but typically, the higher your balance or the longer you keep your money in the account, the more interest you can earn.
GICs work similarly to savings accounts, as you can earn interest on your funds without the risk of losing your original principal investment. However, unlike many savings accounts, GICs are not meant to be touched for a set amount of time. GIC terms range from 30 days to 10 years, so you can choose the option that works best for your investment goals. GICs usually require a minimum deposit between $500 and $1,000.
How much do I have to invest?
If you have a large sum of money to invest, a GIC will usually help you earn a better interest rate than a savings account. However, it’s important to keep in mind that there are penalties for early withdrawal, so you have to be certain that the money invested in a GIC won’t be needed for the entire term of the certificate.
If you want to make ongoing contributions to your investment, then a HISA might be the more appropriate option. You can continuously add to your savings as long you hold the account.
RRSP vs. TFSA
RRSP and TFSA: What are the main benefits and key differences?
Essentially, both the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) let you shelter your investment returns from taxes.
An RRSP is an investment vehicle that helps you grow your retirement savings. One of the main benefits of an RRSP is that you defer paying taxes on the money you contribute and any investment income earned, until years later when you withdraw your money in retirement.
A TFSA is a relatively new investment vehicle that was introduced in 2009. It can be used to save towards retirement, but also many other goals because, unlike an RRSP, you’re free to withdraw funds at any time without penalties. The main benefit of a TFSA is that they are completely tax free. Since you’ve already been taxed on the money you put into your TFSA, any income you earn from the investments within your TFSA is tax free, even when withdrawn from the account.
What type of investments can I hold in an RRSP or TFSA?
Generally, the same types of investments are permitted in both. There are a wide variety of options to choose from, including cash, guaranteed investment certificates (GICs), exchange-traded funds (ETFs), mutual funds, stocks and bonds.
What is a mutual fund?
A mutual fund is a professionally managed investment that pools money from different investors to invest in a variety of stocks, bonds, short-term money market instruments or other securities.
Mutual fund investors get the benefit of diversification and having a professional manager reviewing their investment on an ongoing basis. Their investment knowledge can be an invaluable resource, especially for many investors, who simply don’t have the time or investment expertise to micro-manage their investments.
The various savings and investment choices mentioned have their own unique benefits, and to maximize their effectiveness, your personal circumstances, time horizon and risk tolerance should be considered. A Scotiabank advisor can recommend options and help you choose an investment strategy that works best for you.