Protect yourself from financial stress by spending less than you earn. Find a savings account that pays real interest. Step up your game by putting your money out of reach for a year. Accessing a whole new level of savings interest rates.
Take out less than you put in
The first step in planning your financial future is to start saving some money. If your bank balance is consistently zero before payday, then you’re in big trouble if that payday doesn’t happen exactly as expected.1 In this scenario, your financial future depends entirely on your future earning. You’re probably vulnerable, and things can fall apart very quickly.
If you start to hold on to some money past payday, then you start to buy yourself some future-protection — you’ll be able to put gas in your car the day before payday!
Once you start accumulating a bank balance, you might be pleased to find out that your money can start to take on a life of its own. If you put it away, give it some privacy, and wait for a while, your money can have baby money.
Your everyday chequing account probably isn’t going to pay real interest though. The default savings account at your bank probably isn’t either. They say they’re paying interest, but when I checked July 10, 2023, TD and ScotiaBank were paying 0.01% on savings accounts, and RBC was paying 0.005%. That’s so close to zero that they should be ashamed of themselves. Don’t settle for what the big banks call “savings accounts”. You can do better.
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Savings accounts
When you know there is such a thing, you can find real banks that pay real interest on savings. But it can be tough to find them because everyone’s trying to make money from your search. One site I thought was a legitimate comparative review sites (Ratehub) keeps showing up in my searches. But a small “Advertising Disclosure” on their high interest savings account comparison page confesses that
“Most of the products listed on our website are from partners who compensate us. Products marked as “featured” or “sponsored” in our comparison tables are compensated, and are ranked above those that are not compensated.”
(Another site that I thought was good stuff (Moneysense) is owned by Ratehub. This doesn’t mean these sites don’t contain valuable information. Just be skeptical of what you see.)
Another trick to watch out for is short-term special rates that are in effect only for a few months. If you get a high rate for a few months that reverts to a lower rate, you’re probably going to earn less interest than if you went for a less spectacular rate without an end date.
I did find a comparison site https://www.highinterestsavings.ca/chart/that appears to offer fair and unbiased information. (This site was referenced on Reddit in r/PersonalFinanceCanada — another place I often go looking.)
I make 2.5% interest on savings at EQ bank. That’s not as impressive as it was a year ago but it’s enough to make a difference — especially with a bigger balance. ($40,000 at 2.5% will earn $1,000 in a year.)
You’ll probably access these higer-interest savings accounts electronically, by linking the savings account to your chequing account so that you can transfer money in both directions on-line.
Savings accounts are risk-free, guaranteed by the Government of Canada (up to $100,000 per account).
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Guaranteed Investment Certificates (GICs)
Once you’ve built up a big enough savings cushion that you can afford to lock in some of it for a year, you can access even better interest rates by investing in Guaranteed Investment Certificates (GICs). EQ bank is paying 5.5% interest on a 1-year GIC today (July 13, 2023). (Their savings account rate remains at 2.5%.)
These are very accessible investments that are available from most banks/credit unions, and they don’t require an investment account. You agree to keep your hands off your money for a while, and the bank gives you significantly more interest than what they pay on their savings accounts.
GICs are generally guaranteed up to $100,000 by the Canadian government.
Some banks also offer redeemable GICs that pay less interest but allow you to cash them in early if something comes up.
GICs are offered in various terms ranging from months to years. With long term GICs you might end up with your money tied up earning a lower interest rate than what you can get in the future. But you are guaranteed to get what you signed up for.
One way to compensate for both the money being tied up and the changing interest rates is to hold a series of GICs with staggered maturity dates (a “ladder”). You could do this by dividing your money into five parts and buying 1-, 2-, 3-, 4-, and 5-year GICs. Then every year you’ll have money becoming available to use or to reinvest. If you reinvest in new 5-year GICS then the cycle will continue.
I’ve been buying a 1-year GIC each month. Now we have money becoming available every month, and we can buy another 1-year GIC if we don’t need the money right now.
You need to shop around if you want to get the best GIC rates. Start by checking your own bank (where your money is now) and use their rate as a reference.
(Today (July 25, 2023) RBC has a “special rate” of 5% — with a “posted rate” of 3.25% — for a one year GIC. I assume that means that they’re caving in to peer pressure without completely giving up the lower rate they’d rather be paying.)
If you’re willing to shop around, the “highinterestsavings.ca” site mentioned earlier has a GIC comparison table which can help you check out the competition.
The big banks and credit unions are more likely to offer redeemable GICs (at a lower rate), so that might be worth considering if you can’t commit to a term.
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Investment Savings Accounts
This section might be confusing, because I’m using the terms “investment account” to refer to the brokerage account which contains your investments, and “investment SAVINGS account” to refer to the specific interest-bearing “security” (investment) that can be used as a savings account. I’m not making these names up, but they’re not always called the same thing by everyone. So bear with me and watch for the word “savings” in the middle of “investment SAVINGS account”.
It’s possible to get high interest rates comparable to what you an get with a GIC, but without giving up access to your money. To access these rates, you’ll need an investment account with a broker — not a big deal, just another on-line account, or maybe even an app. (I’ll get into more details later in an introduction to investing.)
Once you’re set up with an investment account, you can access investment choices offered as mutual funds and ETFs (which I’ll describe later) but are actually high-interest pooled savings accounts. Pooling the savings of many participants results in very large deposits which open doors to otherwise unattainable interest rates.
You make deposits by “buying” these investments and make withdrawals by “selling” them. You’re allowed to put your money in one day and then take it out the next day if you want. Or you can leave it there until you really need it, or until you retire. As long as you leave it, it earns interest and increases in value.
These investment SAVINGS accounts are designed for investors looking for a place to park their cash when it’s not invested in something more exciting. But they also work for people who are excited enough by high interest rates and might not want to invest in stocks and bonds.
Just to be clear: when you open an investment account, it could be used for high-risk, high-reward investments in the stock market. But if you’re not ready for that, or just not interested, it opens the door to safe, guaranteed high-interest savings with an investment SAVINGS account. There is no risk involved.
Not every broker offers the full range of Investment SAVINGS Accounts. The big banks only make their own offering available to their investing customers. And WealthSimple doesn’t offer mutual funds, so the investment SAVINGS accounts that present as mutual funds are unavailable from them. (They offer high interest savings ETFs though.)
Once you’ve got your high-interest investment SAVINGS accountset up in your investing account, you can use it like you would an ordinary savings account. Transfer money between your spending account and your investment account, and buy/sell to deposit/withdraw.
You can keep your “emergency fund” here because you can get at the money in a day or two. (Sell today and transfer out the next business day. It might take a couple of days for the transfer.) Or you can leave it there and let it grow, year after year.
Looking ahead…
When you get serious about investing, you’ll find that serious long-term growth is going to require investment in the stock market. You’ll find that your high-interest savings works along with your high-performance stock market investments by protecting some of your money from the volatility of the stock markets. You’ll always have some safe cash you can use if you need it. I’ll go into more detail about balancing risky with save investments when I write about INVESTING.
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Registered vs Non-registered accounts
All of the savings and investment options discussed here (savings accounts, GICs and investment savings) can be held in either registered (TFSA, RRSP etc) or non-registered accounts. The “registered” accounts protect the interest you earn from income tax. The “non-registered” accounts will report your income each year to the CRA and you’ll need to report it as income on your tax return. When you set up any of these accounts you’ll be asked which kind you want.
As discussed elsewhere you’re generally better off saving and investing in a registered account — and the TFSA is probably best. (see discussion elsewhere).
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Compounding
I should probably talk about the magic of compound interest, because it’s possible that not everybody knows about this any more, particularly since we’ve just come through a fairly long period of low interest rates.
Once you’re saving money and earning interest, if you leave it alone, you’re earning interest on the accumulated interest along with the money you started with.
The “Rule of 72” describes the fact that your money will double in value due to compounded interest in a number of years equal to 72 divided by the interest rate.
If you can earn 6% on $1,000 then your balance will double to $2,000 in 12 years (72 / 6 = 72). (In another 12 years at the same rate you’ll double it again to $4,000.) Of course the numbers get bigger if you keep adding more money to your savings as you go.
Try plugging in some numbers into a compounding interest calculator like this one to amaze and inspire yourself.
The big payoff over longer periods of time explains why old people tell young people that they should start saving for their retirement at a ridiculously young age.
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Summary
Put some of your money aside so you have it later when you might need it. Find a place where you can earn decent interest on your savings. When you’ve got enough saved that you know you can put it away for a year, you can get a higher interest rate and lock it with a GIC. And with some minor effort you can get similarly high interest rates in an investment savings account without the commitment.
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- Credit isn’t really a solution to this problem because you’re making it worse by spending your next paycheque before you get it ↩︎
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