Hi everybody and welcome back to budgeting 101.
My name is Jay Copeland
and i'll be taking you through our fourth session in the budgeting 101 series.
Today we're talking about saving for the future,
so let's get into it.
All right, savings...
we talked about debt last time
and savings might seem bit out of the ballpark a lot of the times
because you know we're in debt...
We're...
We're students and we owe a lot of money
and it seems like the idea...
the very idea of saving money that we don't have
as it's out to other people is a little bit...
I don't know it borders on impossible.
But even though it seems challenging especially when you're in school
and spending while in debt,
there are some misconceptions about what savings is...
that we should all be aware of when we're considering how we're proceeding financially
and what we can do to better set ourselves up for a successful financial future.
So here's some things about savings and what you may not realize.
Basically many people are content with putting money in a savings account.
They think that if I put my money into the bank and it's in a savings account,
I'm saving it for later or if I would draw a sum of cash for a rainy day
you know I'll have that set aside for for later when I need it kind of thing.
And while this may work in terms of you've set money aside somewhere,
it's not making your money work for you.
We talked about that very early I think it was in session one
where the concept of making your money work for you,
now we're going to explore that a little more in detail.
So I'm going to use accounts available through the TD Bank as an example.
These may be different based on the financial institution you bank with,
this is just what I'm used to dealing with as a TD Bank customer, so.
Basically if you're saving money in a pile of cash,
let's start with cash.
Well you just withdraw it,
you've got $20 set aside and you keep that somewhere.
That money is gaining no interest.
It's not... it's not appreciating in value in any way,
it's just sitting there.
If you're... you know like me
you probably have like maybe an everyday savings account where
you know your yearly interest rate on on that $20 is sitting
in your account is 0.01%.
That's pretty negligible,
you're basically not earning anything at that point in time
it's a little bit better than cash but
not much buy by any means.
Now if I look at the next level of savings account
through the TD Bank we've got the high interest savings account which is
a 0.05% interest,
but only when the balance is above for argument's sake $5 000.
So it's five times larger than the everyday savings account,
however I have to be maintaining a balance of over $5 000
to be getting that five percent interest.
Otherwise I'm getting none which you know...
unrealistic as a student.
And then just for argument's sake,
a TD ePremium savings account gets you up to 0.1% interest,
twice as much as the previous one
but only again when your balance is above $10 000.
And you know well that may seem like a big... big advantage
and it's like... 'oh how do I get to that',
it doesn't take into account things like the rate of inflation.
So...
The rate of inflation in Canada is currently 1.9% so almost 2%
might be a little bit different this year with the
whole pandemic thing but
typically it averages somewhere around you know
1.5 to 2%.
What you might notice is that the rate of inflation which is
how much your money is sort of depreciating in value
because it's basically as there gets to be more
money injected into the economy through inflation
the value of our money
is not more it's actually lessening
because now we have more money available for roughly the same...
like amount of value that the previous money held.
So the rate of inflation far outweighs that of
even the highest interest savings account.
So savings is then a misnomer.
You're not actually saving money...
savings alone will result in you losing money over time.
So that's something you want to take into account
when you're considering how much you're setting for a rainy day,
and in what ways you're setting that money aside...
because having it sitting there
again is not making your money work for you.
So if not savings then what?
Well there's no guarantee that any one method will work for you.
Or anyone for that matter.
Some options that you might consider speaking to like a financial consultant about
are as follows...
investing in the stock market is
something that many people are afraid of.
They think of things like the stock market crash
and you know how many people had lost like a ton of money
through stocks that have failed,
that we're sort of volatile and things.
But things that you might want to consider when thinking about stocks is
that there's many types of stocks to invest in.
Some of them are more volatile than others
which means they fluctuate more and more significantly,
while others are fairly steady over time.
You know an example of stocks that are fairly steady over time,
if you look into them are...
like Canadian banks...
often like energy stocks... things like that
that have you know,
we use them regularly every day.
You know everyone puts gas in their cars,
everyone puts their money in banks.
These are things that have been long-standing kind of institutions
that you know see a lot
of regular use and aren't like you know tech stocks where it's like...
okay you know Apple's really cool now but
it wasn't at one point in time
and what happens when something comes along to replace Apple.
Well then it goes kind of like the way of blackberry where
the stock drops a bunch and you know you find
yourself maybe in a trouble zone, so.
Those are things worth considering looking into.
Not here to give you stock advice by any means but I am going to
recommend that you look into them as an option for savings because for instance
here the TSX which is the the main Canadian Stock Exchange,
the Toronto Stock Exchange,
has a long-term annual return rate of 9.3% per year
between the years of 1960 and 2018.
So that's nearly 60 years of an average kind of annual return of 9.3%
which is way higher than the 0.01% you're likely to get in your bank accounts.
Now that doesn't mean it's always 9.3% per year
there's some years that are better than others
and some years where it is in fact bad, so...
It's something to know that like if you're savings in this you're probably
in it for the long haul and these are things that you're not going to be
wanting to play with the stock market like you're at a casino and you're gambling.
But this is money that you're investing for a long period of time
hoping for better returns than you'd normally get from your bank.
Other options if you're a little bit less confident in your ability to invest on your own
these banks will often offer you things like mutual funds where they
have a fund manager who is arguably a professional in looking at different
stock options and securities that you can buy through the bank and you're
essentially entrusting your money to them...
to lend it towards a larger group funds buying power to get
a diverse portfolio of stocks that are
going to give you better returns over time then what your savings account
would normally give you.
So these are again professionally managed funds that
pool a group of people's money together to purchase sort of significant like
shares and holdings in a diverse array of companies that hopefully over time is
going to net you better returns than what you would get in your savings account,
and you know arguably beat that sort of 2% inflation per year so you're
actually you know saving money and potentially even earning a little bit more on top.
So your money is increasing in value over time as opposed to
depreciating where it would be just sitting in your savings account
or in a pile of cash under your bed.
Other things to consider through the bank that you might want to look into are
RRSPs or RSPs so Registered Retirement Savings Plans...
Retirement Savings Plans and GICs through your bank which are sort of more
protected than you know...
your stock options would normally be so if you know
the bank for whatever reason comes in trouble that
money is is somehow protected for you to use.
It won't go into too much detail on that
but you know ultimately these plans are available to get you started on
saving for a retirement or a future where you know
you're of an age where you no longer want to be working
and would like to be free to do what you wish with your money.
so it's a bit of a shorter presentation here today on that
but what I would like you to take from this session is
you should go to a financial institution or talk to somebody about
how to better save or invest your money.
So that the little bit that you sort of put aside on a regular basis
is you know working for you as we say.
One of the things again that we sort of talked about was
like okay but where am I getting this money from?
If you have money
to go and have dinner out on the town in a restaurant...
maybe you have you know a little some extras with that alongside
and you spend $20 on a leisure activity that you'd like,
you can put that $20 as it is sort of a. want versus a need,
aside into savings.
You don't have to be saving like thousands of dollars at a time,
you can start small but even if you commit to a goal of
setting aside you know $20 every paycheque
and investing that in some way or...
you know having that money contribute towards something that's going to be
there to support you in the future.
I highly recommend starting that just so you can develop the habit of saving,
of setting something aside for a scenario that doesn't currently exist,
but will at some point in time.
So that you're thinking ahead with your money
and you're considering ways in which you can
make that money work for you,
even if it seems like a small amount,
how do you increase that money over time, okay...
because that's the foundation of the saving strategies
that you're going to build up as you go through the years,
that are going to lead you to being
you know financially free in the future hopefully.
Okay, we'll see you for our last and final session next time.
Hopefully you have success in speaking to a professional about these
you know different options and looking into them and just educate yourself a
little bit on what you feel comfortable with doing
with the money you're able to set aside.
So that you can better prepare yourself for that future that you want.
Alright, until next time.