What's the difference between a Savings Account and a High Interest Savings Account?
Sounds obvious, right?!
A traditional savings account has a lower interest rate than the High Interest Savings account, thereby providing you extra interest income while you are trying to save money! But how much of a difference does it really make?
A couple weeks ago, I wrote a post about Sinking Funds and said that I would write a follow up blog about what type of account to keep your Sinking Funds in.
Now, you might also ask, how much does a percentage difference really make?
Let's compare:
If you started with $1000 and set aside $1000/month over the span of two years at 1.25% compound interest rate, calculated monthly =
Equals $315 in interest earned
versus
$1000/month set aside over two years at 0.010% compound interest rate =
Equals $2.50 in interest earned
Considering that inflation increased to 4.4% in Canada in 2021, I think finding a better interest rate is important!
You might be asking yourself, why would I bother moving my money to another savings account? It's too much work!
Isn't it a lot of effort to move your money to another account or another bank?
If you do decide to move your money to a different bank that provides a better interest rate, you can easily set up a fund transfer that might take approximately a month or so or you could e-transfer yourself if the amount is in a non-registered fund.
or
Negotiate:
Sometimes you can phone and negotiate the newer customer rate if you kindly remind them that you would like to move your money elsewhere.
What's the difference between compound interest and regular interest?
Compound interest is fantastic.
"He/she who understands it...earns it,
he/she who doesn't, pays it." Einstein
Compound interest is great because it keeps on accumulating using the newer amount that you have each month including the interest that you earned from last month, instead of just the original amount that you put into your savings account. For a more complete understanding of compound interest, check out this blogpost: How the Magic of Compound Interest Could Make You a Millionaire.
Did you know?
Not all banks allow you to have a Tax Free Savings Account earning a High Interest Savings account interest rate. For example, at Simplii Financial, I was only able to have a Non-Registered account earning the High interest savings account rate or a TFSA in a regular lower interest traditional savings rate but not both whereas EQ bank allowed me to invest my TFSA in a High Interest Savings account.
Tax Free Savings Account (TFSA)
The TFSA is a registered account which allows individuals who are 18 years of age or older and who have a valid social insurance number (SIN) to set money aside tax-free throughout their lifetime.
Contributions to a TFSA are not deductible for income tax purposes but the income earned in this account is generally tax-free, even when it is withdrawn.
What are High Interest Savings accounts good for?
Saving up for a short term goal and easy accessibility. For example, if you know that you are going to be using the money for a vacation or for a down payment on a house within a year or two, a High Interest Savings account would be a great place to accumulate that money, earn interest and have easy access to it when you are ready to use it towards your assigned goal.
It is important to have your money readily available for an Emergency Fund to pay the bills in cases of unemployment, injury or illness.
It's also a great place, to have your money readily available for your Sinking Funds like I mentioned earlier on.
Check out some of the latest reviews on which banks provide the best High Interest Savings accounts:
Nerd Wallet
Spoiler alert! It's not one of the Big Five Banks in Canada.
Warning:
Some banks have limited time offers of a better interest rate but will revert back to a lower interest rate after that limited time.
Other factors to consider:
Carefully read the fine print and see...
How often is the interest calculated: daily or monthly?
Are there transaction fees to withdraw your money? and how much are the transaction fees?
Is it provincially or federally insured, if that is important to you?
Does it require a minimum balance in order to receive any interest income? Some savings accounts won't even provide you with any interest income until you have a minimum of at least $5,000 in some and $10,000 in others.
For example, look at the latest TD bank offers for their 3 different types of savings accounts.
Are you taxed on the interest earned? It depends if it is in a registered or non-registered account?
Now Go and Be Intentional about choosing a High Interest Savings account!
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