BUSINESS

How to Get the Best Return on Your Savings

02/11/2013 12:42 EST | Updated 02/21/2013 11:14 EST
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It's the eternal question: if you want to secure your financial future, how should you go about it? Should you save or should you invest? Well, the type of cushion you want to create depends largely on your financial goals. Whether they're short-term, like a wedding, vacation, or a down payment, or long-term, like your child's education or retirement, you need a quality savings plan or investment strategy to make them happen, and to get the best return on your hard-earned money.

Saving

Finding the Money -- There are a number of ways to find the money to put away. Some people set a specific target and put all their money, after bills and other obligations, towards their goal, while others use extra money that's freed up after they cut some spending. Whatever you choose, money coaches advise you should set a reasonable target that doesn't put you into debt and any outstanding credit card debt should be paid off before you put any money away for savings.

The Earlier, the Better -- The younger you are when you start saving, the harder your money works for you, thanks to the miracle of compounding interest. For example, take girlfriends Marla and Maureen:

[The two] are both age 65 with $500,000 in retirement savings. They both used the same investment funds, with an average rate of return of 4%. But Maureen's contributions over the years totalled $360,000, while Marla only contributed $216,000. How could this be? The power of compounding returns! Marla started contributing $500 per month when she turned 29, while Maureen waited until she was 53 to start saving. Maureen had to contribute $2,500 per month to end up with the same amount as Marla.

Knowing Your Options -- A common question is whether you should go with a TFSA or an RRSP as your savings vehicle. Banks commonly recommend a TFSA if your goal is fairly short-term and both if you're looking towards the long-term. Your decision should also depend on your tax bracket when you withdraw the funds. If you expect your tax bracket to be the same or higher, then a TFSA may be advantageous, but if you think it will be lower, then a RRSP may be better. You can always set up an automatic deposit for either route. Also, some employers offer group savings plans where they match a certain portion of your contributions. Others offer opportunities for automatic savings via payroll deduction.

Investing

Risk Tolerance and Time Horizon -- If you would lose sleep and peace of mind after a 25% loss on your investments, maybe high-risk investments like stocks aren't for you. However, if it's a long-term investment, you are more likely to have ample time to recover any losses sustained. But if you intend to cash out in the next five years, you may wish to try something more stable like bonds, GICs or mutual funds.

Asset Mix and Diversification -- It's important not to put all your eggs in one basket. An ETF or mutual fund contains many different stocks, which may reduce your risk by providing a certain level of automatic diversification. According to your financial goals, you should decide what percentage of your assets should be cash for purchases, fixed income for stability, and equities for long-term growth. A financial planner can tailor your asset mix to your particular financial objectives.

Don't Sweat Timing the Market -- Whether you're saving, investing or both, putting it all together -- determining asset mix, time horizon, financial goals and risk tolerance -- can be a very challenging process. Consulting a financial planner is a great way to benefit from the tools and expertise they have to establish a successful savings plan that will see you through to retirement.

* This article is not intended to provide advice. Speak to your investment advisor and tax advisors before making investment decisions.