There are almost as many ways to grow your money as ways to order coffee at Starbucks. Knowing what you’re planning to do with the money is a key consideration in choosing how to make your savings grow. If you’re looking at retirement 20, 30 or 40 years down the road, that’s very different than trying to build up a stash of cash to buy a house, put your kids through school, or go on a much longed-for family holiday.
There was a time when the only thing an RRSP was used for was retirement planning. But today, people use their RRSPs for a multitude of purposes. Some people dip in when they quit their jobs to return to school or train for a new career. Couples with families dip in to provide income while one or the other is at home with their tots. People thrown into periods of unemployment because of declines in business and layoffs dip in to make ends meet. Even the government got into the swing, introducing two perfectly legal ways to dip in without tax consequence: to buy a home or to fund your education.
Whether you’re using an RRSP, a TFSA or a high interest savings account to accumulate money, you must first know your purpose – your final goal – before you try to decide what investment vehicles to opt for. If you do have a long-term investment horizon – more than 10 years – you’ll be fine buying stocks and equity-based mutual funds, assuming you have the stomach for them. But if you’re using your savings pool to finance the purchase of your first home in a few years, you don’t have a long-term investment horizon. It doesn’t matter that you’re using an RRSP as your savings vehicle. It doesn’t matter that GICs are paying a paltry 2%. If you’re planning to pull some or all the money out for a downpayment, you have a short-term horizon and shouldn’t be in equities.
As you draw closer to your goal, the amount of time until you’ll need to use the money shortens. No matter how long-term your home ownership plan starts off as, at some point before you go house hunting you have to adjust to a medium and then a short-term investment horizon. That means moving from alternatives like stocks to medium-term bonds, then short-term deposits and eventually, cash.
Make sure you don’t sacrifice your long-term goals for your short-term dreams. If you’re saving for a home, instead of putting your whole RRSP contribution into your “Home ownership RRSP” this year, divide it equally between home ownership and retirement. Yes, it will take a little longer to get into your dream home. But when you do, you won’t be behind the eight ball in terms of retirement planning. Striking the right balance in saving is just as important as in life. A little into each pot will serve you well.