When it comes to short term, safe and reliable ways to store your money, a high interest savings account is a good way to go. They provide easy access, and best of all, no volatility! But don’t be fooled by what some banks refer to as ‘high interest’. And don’t underestimate the difference between 0.5% and 2% when it comes to you savings interest rate and how it will grow your money.
What is a high interest savings account?
A high interest savings account it pretty much exactly what the name describes. It is typically a savings account that provides someone with a fixed yearly interest that’s paid out monthly. This type of account provides predictability – you know exactly how much you will earn, and it will always be available – there is no risk! High interest savings account’s are a good option for someone looking to store their short term savings, or emergency funds.
What is considered “High interest” by the big banks?
There seems to be a vast difference in what is considered “high interest” for a savings account. Let’s look at the rates for the big 5 banks in Canada:
These are pretty ridiculously low rates! Saving your money in one of these accounts may leave you further back than ahead.
The losing battle against inflation
Inflation (the fall in purchasing value of your money) can typically be anywhere between 1% and 3% per year. This means that money you store in one of these ‘High Interest’ Savings Accounts will have less purchasing value at the end of the year than at the beginning of the year. Let’s look at an example:
The $10,000 you stored in this account made you $80 of interest by the end of the year, but still left the purchasing value of that $10,000 less than what it started. How are people supposed to safely store their money without it losing it’s value over time?
What are the alternatives?
Don’t fret! There are options other than the big 5 banks. RateHub.ca provides a great up-to-date list of the current high interest rates available to customers. You’ll find that they can range between 1.50% and 2.00%. That may not seem like much more than what the big banks offer, but let’s look at the same example again:
With this 1.95% high interest savings, a person can beat out inflation, and still earn extra money on their savings. An extra $42 might not seem like a lot, but it adds up over time, especially as you start to save more and more. Let’s look at an example of someone who has been able to save up a bit more:
That’s a $714.13 difference in purchasing value of your money in a year! All for doing nothing but storing your money in an account with a better savings interest rate.
You can also check out EQ Bank and their 2.00% interest rate.
But are these banks reputable?
Never having heard of some of these banking institutions that RateHub.ca suggests may leave some people a little nervous. Check that the bank is CDIC insured if you’re worried about an online bank that you’re thinking of using . I’ve found places like Red Flag Deals and highinterestsavings.ca are you usually the place to go to get the lowdown on these unknown banks and credit unions, so look them up if you still have any concern.