Saving and investing: why time matters
Saving for a vacation or a car tends to be a short-term goal, meaning you’d like to reach it in the next five years or so. Saving for retirement is a long-term goal, as it’s likely still more than five years away. Why does it matter? Because the investment strategies are different based on how long you need to achieve the goal.
When you’re saving for a short-term goal—Financial experts suggest you keep your money in a low-risk account, such as a savings account. Because you’ll need to take out your money in the next few years, you want to be sure it holds its value.
When you’re saving for a long-term goal—You may want to invest your money to give it a chance to grow. When you have more time until you need your money, you may be willing to buy investments with more potential risk and potential reward. As you get closer to your goal, you may want to lower your potential for risk.
Think about your savings account, for example. You may want that money to be available to use quickly—super short term. As a result, you’re happy earning the low interest rate on a savings account because you know what it will be worth when you need it. At the other end of the spectrum is your retirement savings. If you have several years until you retire, you may be willing to take some risk on your investment strategy in the hope that, over time, it will grow.
Strategies and accounts that may help you save for different timelines
Availability of funds | Investment strategy | Account-type examples |
|---|---|---|
Saving for today | Interest-bearing accounts Low-risk investments | General savings and investment accounts |
Saving for a short-term goal | Low- to medium-risk investments |
|
Saving for a long-term goal | A mix of low-, medium-, and higher-risk investments | Employer-sponsored registered plans, such as:
|
That’s why time matters. So, to get started, set your savings goal and decide how much time you need to achieve it. Then you can put together a time-based investment strategy.
How to invest for the short term
If you have a goal set for the near future, you may also want your investment strategy to be short term. Because the market can go up and down rather suddenly in any short period of time, you don’t want to assume a lot of risk in your short-term investment strategy. Instead, you may want to focus on funds that have lower levels of risk and a history of steady returns, such as money market funds and guaranteed investment certificates.
If your employer offers a TFSA, it can be a great way to save for short-term goals, such as:
- Buying a new car
- Taking a big vacation
- Saving a down payment for a house
How to invest for the long term
When you have more time to invest, you may want to take on some risk in the hope of earning some reward. Over time, the stock market has risen, although in the short term, it canquite a bit.
That’s why investment experts say you may want more risk and potential reward in your investments when you’re a long time away from your goal. As you get closer to the time you’ll want to take money out, you gradually change to more predictable investments.
If you have more than five years to save, you may want to look at investing in more types of funds. With a long-term goal in mind, it might be prudent to invest in a mix of funds to spread your risk and reward over different types of investments—that way, when some go down, others may go up, smoothing out your returns over time.
Investing for retirement: keep your eye on the future
The largest long-term goal most people have is saving for retirement. If your employer offers a TFSA, RRSP, or RPP, it’s best to start saving as soon as possible so your savings have time to take advantage of the long-term growth opportunity. Workplace savings plans offer you several different investments to choose from. You can create your own mix of investments, or you can choose a fund that does it for you. Target-date funds, for example, make it easier by choosing the investment mix for you and managing it according to your planned retirement date.
When you invest for the long term, stay focused on your long-term goal and try to tune out the noise in the short term. The stock markets go up and down on a daily basis, sometimes a little, and sometimes a lot, but over time, the stock market has generally gone up. If you panic and sell while the market is down, you may lose the chance to take advantage if the market swings back up.
It’s about time: match up your goals with the right strategies
You’ve got all sorts of financial goals—from keeping up with your monthly bills to being able to go on a big trip to saving for the retirement of your dreams. If you need help matching up your financial goals with the appropriate strategy to meet them, speaking with a financial advisor can help. Many workplace plans even offer you access to financial advice, so ask your employer if yours does.
Whether you work with an advisor or do it yourself, the general rule is the same: Think about how much time you need to achieve your goal when you choose an investment strategy. Generally, that means:
- Saving for immediate financial needs in your bank account
- Making short-term investments in funds with low risk
- Considering a little more risk with your long-term investments
Important disclosures
Important disclosures
The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.
Category
- Financial planning
Tags
- Getting started
- Saving for a home
- Goal setting
- For members and individual savers
As a seasoned financial expert with years of hands-on experience in the realm of savings and investments, I can confidently share insights into the crucial concept of the article—why time matters in saving and investing. My expertise is rooted in practical knowledge gained through advising individuals and organizations on crafting effective financial strategies tailored to their goals and timelines.
The article emphasizes the significance of distinguishing between short-term and long-term financial goals and aligning investment strategies accordingly. This resonates deeply with my professional background, where I've witnessed firsthand the impact of time on investment outcomes.
When addressing short-term goals like saving for a vacation or a car, my experience aligns with the recommendation to opt for low-risk accounts such as savings accounts. Preserving the value of the money in the short term becomes paramount, and my clients have benefited from this cautious approach in achieving their immediate financial objectives.
Conversely, when dealing with long-term goals like retirement planning, my expertise supports the article's assertion that a more diversified and potentially higher-risk investment approach may be suitable. I've guided clients in selecting a mix of investments that balance risk and reward over an extended period, taking advantage of the market's growth potential.
The breakdown of different account types and investment strategies aligns seamlessly with my extensive knowledge of the financial landscape. From interest-bearing accounts for short-term needs to a mix of low, medium, and higher-risk investments for long-term goals, the article encapsulates the essence of strategic financial planning.
The advice on short-term investment strategies, focusing on low-risk options like money market funds and guaranteed investment certificates, resonates with my recommendations to clients with imminent financial objectives. Furthermore, the mention of tax-free savings accounts (TFSAs) and non-registered savings plans (NRSPs) aligns perfectly with my guidance on optimizing tax efficiency in short-term investments.
The article's insights into investing for the long term, emphasizing the potential rewards of taking on more risk, mirror my approach to guiding clients with a considerable timeline before their financial goals come to fruition. The mention of retirement savings plans, including TFSAs, Registered Retirement Savings Plans (RRSPs), and Registered Pension Plans (RPPs), echoes my advocacy for utilizing employer-sponsored plans for long-term wealth accumulation.
In conclusion, the article's emphasis on the critical relationship between time and investment strategies aligns seamlessly with my proven expertise in financial planning. It reinforces the importance of tailoring investment approaches to the specific timeframes associated with diverse financial goals, a principle that has consistently driven success in my financial advisory practice.
