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Last week I started the series on Step 3 of Building Successful Finances: Preparing for what you want, which involves 3 things: 1) Dealing with Debt, 2) Saving, and 3) Investing.
Last week I discussed dealing with debt. You can read it here.
Today, we talk about Saving.
Most households start preparing for their future by investing. While investing can be good, it should be secondary to saving. The one exception to this may be your contribution plan through work. Where else can you so easily double your money?
Why Save Before Investing?
As mentioned last week, to build strong finances it is important to have as much control of your money, as much access to it, and as much financial security as possible. Saving – generally speaking – offers you control, access, and security in a way investing doesn’t.
Saving gives you greater financial security.
Your money is guaranteed to grow when you save. You can not lose it. While investing has the potential (no guarantees) to earn greater returns, you also take on a greater risk: the risk of losing your money. Saving builds security and a strong unshakable foundation to your future wealth. Build your secure foundation by saving prior to investing.
Saving gives you greater control.
This control increases when you save using a tax-free account, because upon withdrawal you have full control over how much you take out and how much is in your bank account. Tax-rates continue to change - and it is likely they will increase in the future - but you and I have no control over that. When saving or investing in taxable accounts, you leave yourself with tax-risk. Tax-deferring feels good now, but many people end up paying more taxes overall and have to pay their taxes after they've lost many of the tax deductions they had when they were younger. In most cases, it is better to pay your tax now and control all your future income when you need it.
Saving accounts make accessing your money easier.
Most savings accounts offer you quick access to your money when you need it. This is really beneficial during financial emergencies or when a great opportunity arises. Saving accounts and investment accounts can be 'locked-in' - which limits your ability to access money when you need it - but you can generally access your open saving accounts more quickly than your investment accounts.
Finally, a few quick thoughts on saving:
- In most cases it is best to avoid locked-in accounts. Try not to commit to a term where you are penalized for withdrawing money. (This is generally true for mortgages as well. More on that another time).
- Some people think saving is a bit of a waste because of the low interest rates typically offered. You can find places to save and earn more than your account at the bank. Competitive rates in a tax-free saving environment are out there.
- Take advantage of the room in your T.F.S.A. (you can even use your T.F.S.A. for investing. We will talk about that next week). Whatever is in that account is yours to keep. You can withdraw it without being taxed.
- One of the most under-rated and under-utilized saving tool is a High Cash Value Account, through an insurance company.
If you would like help deciding on a place to save your money, I'd love to help.