Question

Sandra Chan, 22, has just moved to Winnipeg to begin her first professional job. She is concerned about her finances and, specifically, wants to save for a “rainy day” and a new car purchase in two years. In order to finance her move, Sandra had put aside some money. Now that her move is finished, Sandra has $1000 remaining in her chequing account at the bank. Sandra is unsure if she should put this money aside in a “rainy day” fund, or if she should put this money aside for a new car purchase. Sandra has reduced her savings options to four choices:

- Leave the $1000 in her chequing account where it will earn 0.25 percent per year.

- Deposit her $1000 in an online investment savings account where she will earn 1.35 percent per year.

- Invest her $1000 in a Canada Premium Bond that pays interest of 1.00 percent per year.

- Invest her $1000 in a 2-year GIC that pays interest of 1.50 percent per year.

A. Which short-term investment is most appropriate for Sandra’s situation?

B. Assuming Sandra remains unsure as to what she will do with the $1000, does it really matter if Sandra puts her $1000 in a “rainy day” fund or a “car purchase” fund?