When it comes to choosing where to put your money, your choice should be based on your personal financial goals: What is the level of risk you’re willing to take? And when would you need your money back? Your financial advisor should help you with that. That’s why you should choose your advisor carefully. A lot of financial planners and advisors have grandiose titles on their business card, but many are no better than salesmen. Their goal is just to make you buy the specific investment fund they work for and take their commission. Click here to have some tips about how to choose your advisor.
Now let’s say you’re managing well your personal finances and now have some money to save. You should put it somewhere safe right? You could either keep it in cash under your pillow our burry it in your garden (which are not very good ideas); or you could put it in a saving account, or you can but a physical asset (like a house, gold, or an artwork). Unless you’re already an investment expert, he easiest thing to do (and that’s what most people do) would be to put it in a saving account and let it grown. But with so many types of savings accounts and so many rules, it’s somehow hard to figure out which one is really the best for you regarding your personal goals right? This this why this article is for: help you understand how a savings and investments account works and which one suits you.
Savings and investments accounts are basically like “wallets”.
So, think of them like some wallets. You can hold whatever you want in these wallets: your money in cash, financial asset you’ve bought like stocks, bonds, mutual funds shares, etc… We will look into details of these different financial assets later.Let’s just focus on the wallets now.
There are essentially 3 mains types of “wallets”:
- Your regular “high interest saving account”,
- registered account (like RRSP, TFSA…),
- and unregistered account.
The differences will be explained below.
Regular saving account
Most banks offer their clients savings accounts along with checking accounts. When you put your money into your bank’s regular savings account you are lending your money to the bank and receiving a very low rate of interest (usually below 1% annually). Ironically, they label those accounts “high Interest saving accounts”. The bank uses your money to lend to other customers, charging a higher rate of interest. The difference between those two rates is how the bank makes money. The value of your account can never goes down and it only slightly goes up with the payment of those “high” 1% interest. Because it’s usually easy to instantly deposit and withdraw money from these accounts, you should use them only if you’re putting money aside for emergencies needs or for short terms goals like to buy a computer, a car or to finance your next vacations. Your money is very safe, but you earn almost nothing since interest most banks pays you are close to zero percent.
Registered and unregistered “wallets”
On the other hand, instead of just lending your money to the bank you can open a registered or unregistered account to invest it. When you open a registered or unregistered
saving investment account, it is usually to invest (buy and hold) financials assets. We will look into details of different financial assets later. All you need to remember from now is that you can hold almost any asset you want in your accounts. This is important because most financial companies tend to advertise the “wallet” instead of the asset they make you buy and hold into this wallet.
A non-registered investment account is a type of investment account that is not controlled by the government and therefore, have almost no restrictions. Anyone can open one, can put any amount of money in it and keep it as long as he want to.
A registered investment account is an account registered with the government. Which means that the government oversight of how the account operate with the financial institution, who can open the account, how much money you can put in and take out, when you can do so, and which assets you can and cannot hold. TFSA, RRSP, and RESP for example are the most commons examples of registered accounts.
Since it’s a bit more complicated (and sometimes expensive) to take back your money, most of these “wallets” are made for long terms goals like saving for your retirement, or for your child’s education. Financial analysis is often required in order to determine which type of account will provide the most benefit. Financial advisers are trained to help you with that.
Buts why are there registered and unregistered “wallets” to hold investments?
The answer is simple: TAXES!
Investing your money means you can possibly make profit. That profit is called “Return on Investment”, and the government would want his fair share of that profit (they tax almost 50% of your profits in some cases). High taxes on investment gains and inflation discourage average people from saving and investing. But in the meantime, government want to encourage (especially low- and middle-Income families) to save money themselves so they don’t rely solely on government’s money later (for their retirement or their children college education for exemple). That’s why government created “registered accounts”. If you hold your investments through these registered “wallets”, the government promise you not to tax your profits, or to tax it at a lower rate. Therefore it’s always better to hold your investments in a registered account if you can. You can play around and avoid having to pay high taxes on your profit!
meme / One does not simply invest with high taxes profits.
In the next chapters, we are going to review some of the most common registered accounts in Canada.