Why should you consider investing?

Let me start off by differentiating between saving money and investing money as there is a big distinction between the two. Even though there is a distinction, they do overlap. A five year old saves money by putting money into a piggybank and an adult could be doing the same thing conceptually by putting money aside in a savings account. But savings turns into investing when one uses the money saved up to purchase an asset that they are expecting to earn a return on.

Now most saving accounts in banks do earn interest. The interest ranges between 0.5% and 2% a year.  But I do not consider these accounts as an investment account for several reasons. Firstly, the interest rate is barely over the inflation rate, which in the long term means that your money is not growing in REAL terms. Secondly, this is just a way of enticing people to keep their cash flows in a bank while the banks uses the cash to loan it out and earn even a higher interest rate on the money.

I am going to use an example to further solidify the difference between investing and saving, using Royal Bank of Canada as an example. The high interest e-savings account offered by RBC gives an interest rate of 0.800% a year. On the other hand, if you were to invest the money by buying RBC shares, you would be getting approximately 4% every year. The graph below represents how much $10,000 would grow in 10 years if you were to choose between the savings account and RBC shares:

 

hyder

Keep in mind that the above graphical representation is a very simple representation of a real scenario. Firstly, we are keeping out the growth in share values out of the growth in RBC shares. Secondly, we are not taking into consideration the timing of the interest rate payments and dividend payments. The interest is paid on a monthly basis, which means that after compounding on a monthly basis the money will grow for little bit more than 0.8%. The same goes for the dividends, which are paid on a quarterly basis. Thirdly, we are keeping out increase/decrease in the interest rates as well as the increase/decrease in the dividends paid by RBC, as we do not know what the future rates would be.

Today, we looked at the main reason behind why you should consider investing your money. But there is a lot of thought process involved in investing. There are multitudes of different assets to invest in (shares, bonds, ETFs, Mutual Funds, Index Funds, Private Equity, Real Estate, and the list goes on and on), plus there are a few different investment vehicles to consider (RRSP, TFSA, Pension Plans, Regular Investment Account). Each of the above mentioned asset class has its own risks and rewards and each investment vehicle has its own pros and cons, which we would cover in the future.

If you do have any questions, please leave a comment. Until next time,

Disclaimer: The above example is presented only as an example and should not be considered investment advice. The thoughts presented in the article are my own and should only be used for informational purposes. Thorough research should be done before investing money into any asset.

About The Author

Hyder Karim
Finance Professional

Hyder Karim - Graduate from Wilfrid Laurier University. I graduated with Accounting majors, however I slept through most of my fourth year. It was not until I graduated I realized that it was the lack of interest in accounting that caused me to snore during class. My transition into finance was more of an epiphany than anything else in my life, as I sat staring at my first pay check and thinking of ways that i could spend it that I realized I could do more by putting my money to work. And thus began the two year journey into the financial markets. I will be writing to you about my experiences as well as some simple skills that I picked up. If you have any questions regarding stocks, investment vehicles (mutual funds, etfs, bonds etc.) and products (RRSP, TFSA, LIRAs),

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