What banks do
A bank is a business that keeps money safe and provides financial services. Credit unions offer similar services and are owned by their members.
Banks:
- hold deposits in chequing and savings accounts
- make loans, such as mortgages, car loans and lines of credit, using deposits
- pay interest to savers and charge interest to borrowers; the difference is how banks earn much of their profit
- offer debit and credit cards, online banking and payment services
Chequing and savings accounts
| Chequing account | Savings account | |
|---|---|---|
| Purpose | everyday spending | saving for goals |
| Access | debit card, e-transfers, bill payments | fewer transactions |
| Interest | little or none | some interest |
| Fees | may have monthly fees | usually low |
Is my money safe?
Deposit insurance protects your money if a bank fails.
- Canada: the Canada Deposit Insurance Corporation (CDIC) protects eligible deposits up to $100,000 per category at member institutions.
- United States: the Federal Deposit Insurance Corporation (FDIC) protects deposits up to $250,000 per depositor, per bank, per ownership category.
Saving
Saving means setting money aside for later. Good savers:
- pay themselves first by saving part of each paycheque automatically
- build an emergency fund, often three to six months of expenses
- save for specific goals
Tax-advantaged accounts
| Canada | United States | Purpose |
|---|---|---|
| TFSA (Tax-Free Savings Account) | Roth IRA | savings and investments grow tax-free |
| RRSP (Registered Retirement Savings Plan) | 401(k), traditional IRA | retirement savings; tax deferred |
| RESP (Registered Education Savings Plan) | 529 plan | saving for education, often with government grants |
| FHSA (First Home Savings Account) | saving for a first home |
Investing
Investing means using money to buy assets that may grow in value or pay income. It usually offers higher potential returns than a savings account, but with more risk.
| Investment | What it is | Risk |
|---|---|---|
| Savings account, GIC or CD | deposit that pays interest | low |
| Bond | a loan to a government or company that pays interest | low to medium |
| Stock | a share of ownership in a company; value can rise or fall; may pay dividends | medium to high |
| Mutual fund | a professionally managed mix of investments | varies |
| Index fund or ETF | tracks a market index, such as the S&P/TSX or S&P 500; low fees | varies with market |
| Real estate | property | medium; hard to sell quickly |
| Cryptocurrency | digital assets | very high and volatile |
Risk and return
Risk and return go together: investments with higher potential returns usually carry more risk of losing money.
- Stock markets have historically grown over long periods, but can fall sharply in the short term, as in 2008 and early 2020.
- Bonds and GICs are steadier but usually grow more slowly.
Diversification
Diversification means spreading money across many investments so one loss doesn’t wipe you out: "Don’t put all your eggs in one basket." Index funds offer diversification at low cost.
Time horizon
The longer you invest, the more time you have to recover from downturns and benefit from compound growth.
The Rule of 72
To estimate how long it takes for money to double, divide 72 by the annual rate of return. At 6%, money doubles in about 72 ÷ 6 = 12 years.
Avoiding scams and mistakes
- If it sounds too good to be true, it probably is.
- Be wary of "guaranteed" high returns, pressure to act fast, and investments you don’t understand.
- Watch fees: even 1–2% per year can reduce long-term growth significantly.
- Don’t try to "time the market"; regular investing over time is often more successful.
Try it yourself
- Compare the interest rates of two savings accounts or GICs.
- Use the Rule of 72 to calculate doubling times at 3%, 6% and 9%.
- Build a sample diversified portfolio with $1,000 and explain your choices.
- Research how TFSAs or Roth IRAs work and who benefits most.
Quick recap
- Banks hold deposits, make loans and earn money from interest differences.
- Deposit insurance protects savings up to set limits.
- Saving builds emergency funds; investing aims for long-term growth.
- Stocks, bonds and funds carry different levels of risk and return.
- Diversification, low fees and time help manage risk.