Let’s compare what happens with money that sits in a bank account and money that’s invested. For that we’re doing a Cash versus Investing contest! I agree, you should always have an emergency fund but for the rest, we can compare what it might do over the long term. It’s going to be a rough comparison just to get an idea.
We will be looking at a certain amount placed in a TFSA over the course of 20, 25 and 30 years. Considering the TFSA still grows by 5000 or 5500$ per year. You can find out how much you can put in your TFSA by going on the CRA’s Website. Therefore, we will be adding 2000$ per year to this account. The time should be enough for covering a standard long term investment profile. Since it’s in a TFSA we won’t be considering tax.
The rate is going to be 5% fixed which is conservative and realistic in my opinion (See S&P 500 average of 10% since inception from Investopedia). As you can see 10% is not really accurate, that’s why I think 5% is a good enough average after inflation. The high interest bank account will have 0.5% minus inflation it will be -1.5% per year. Inflation being around 2% per year.
We can have a look at inflation in Canada for the last few years and guestimate what it might be around for the next few years. Let’s say 2% to stay on the safe side.
I almost forgot! We will have a starting amount of 15000$ because it makes sense that you have some savings up front.
The variable will be the fact that one portfolio is going to be invested and the other will not. Remember that on the short term it’s most of the time better to keep your emergency or planned money in a money market fund or high interest bank account to keep it safe. But in the long run it’s another story! Let’s do this!
Let’s Get Down to Business!
I am pretty sure that we will see a big difference between cash and invested money. On the long run, invested money that you don’t need will grow a lot more than the money kept in a high interest bank account.
Using Calculator.net’s calculator, I will calculate the two average amounts we should have after the three time periods.
We have a difference of around 60,062.51$ which is pretty noticeable over only 20 years. This by taking more risk of losing money, but over time the risk of losing money is reduced.
As you can probably see the gap is widening between money kept in cash and money invested. The more the time passes, the more the invested money is getting ahead. We now have a 94,014.69$ difference.
The gap is now 139,569.37$ which means it’s still going strong for the investing portion. I don’t think we need to continue since we see that the chances of making more money when investing are most of the time higher depending on what you invest in and the amount of risk you take.
Indeed, it pays to invest so the hypothesis has been confirmed! The experiment was intended to show the impact it might have to invest the money you don’t need on the short term for the long term. I am talking about 10 to 15 years minimum. That’s the point of compounding, in the long run, the curve is going to grow exponentially with your hard earned money in it! The sooner you start, the more steep the curve is going to be. Always make sure you keep a diversified portfolio and rebalance every now and then.