I get asked this question a lot. All the Banks, Credit Unions, and Mutual Fund companies are telling you that you need to be “Saving for your Retirement.” The Canadian government also gave us the most powerful Savings tool we can have. It’s called a TFSA. **Tax FREE Savings Account.** All of them are trying to convince people that they can save their way to Wealth. That sounds very good and very easy. But, what is the reality?

Well if we are going to deal with reality, lets start at the beginning. Ask yourself, how much do you save every month? $100.00, $200.00 $500.00? or is it more like $20.00 or $50.00 or nothing? Saving is not easy! (There lots of posts here that will give you saving strategies.) Saving is the root of all Wealth Accumulation strategies. Let us look at how far simple saving will get us.

The simplest tool for building wealth and the one the Banks will talk about is compound interest. The key to compound interest working is starting early. **Time is the most powerful investing tool there is.** Too bad so many people waste it. (I include myself in that comment) Compound interest needs time to work. The longer the time the better. For example. If you were to invest $2400.00 a year ($200.00 a month) for 25 years at 6% you would wind up with about $136,000.00. If you invested the same amount for 40 years at 6% you would have about $382,000.00. Yes, time makes a difference. But so does the interest rate and the amount invested.

From the picture, you can see the difference that the interest rate, the amount invested each year, and the years it is compounded make to the total. If you want to have $1,000,000.00 when you retire, you would have to but away at least $6000 a year ($500.00 a month) for 40 years. How much would your lifestyle have to change in order to put $500.00 a month into savings?? That also means you have to be 25 years old or less. If your in your 30s that contribution per year goes to $45,000. We won’t even calculate what that would have to be if you are in your 50s.

When you are just SAVING for retirement, there are 3 big variables. 1) How much are you putting away each month/year. 2) How much is the interest rate you get, and how often the interest is calculated and paid. 3) How many years are you compounding for. Each of these variable can make a huge difference to the final number. As the chart shows.

In our examples we have been working with interest rates of 3 and 6%. In reality what does a Savings Account pay? Would you be able to get even 3% on a Savings account?? I googled Canadian High interest rate Savings Accounts, (Those are not your standard Savings account.) and they ranged from .05% to as high as 2.3%. So at those rates the returns in the examples are too high. Now you could switch from a Savings Account to a GIC. (Guaranteed Investment Certificate) They have much higher rates 2.6 to 3.1%. (Google search) Those rates just might match the returns we had in the 3% example. But GIC’s are little more complicated than a Savings Account.

To restate the question, “Can you save your way to wealth?” I would say NO YOU CAN’T. You need better rates/returns to reach Wealth. So where can I get a better rate?? Guess what, you are now into the world of INVESTING, not SAVING. It is very difficult to Save your way to wealth, but you can INVEST your SAVINGS to generate wealth.