Why You Should Open a High Interest Savings Account

Financial goals include getting emergency funds

Have you ever heard of the phrase “Make your money work”? This is exactly what high interest savings accounts were designed to do.

In today’s economic environment, a regular savings account offers very low interest, often around 0.30%. However, high interest savings accounts generally generate better interests on savings and pay anywhere from 1.05% at major banks to almost 2% at online banks and some credit unions.

What is a High Interest Savings Account?

High Interest Savings Accounts, as their name suggests, offer a much higher interest rate than that offered with a regular savings account. Financial institutions are able to offer these rates for different reasons:

  • Some banks do not have branches, which reduces costs.
  • Since transactions can be expensive and most customers do not use these accounts for day-to-day transactions, banks do not have many transactions to process and can reduce costs.
  • Banks offer high interest rates to garner new customers.

Related: These Money Mistakes are Keeping You Poor

This means you get more money just by keeping your money there! However, there are other aspects of high-interest savings accounts to consider, especially with respect to tax.

Savings to avoid Money Mistakes

What types of transactions can be made with high interest savings accounts?

With a high interest savings account, you can do the following:

  • deposits (cash and cheques);
  • withdrawals (at ATMs, bank machines, in stores, etc.);
  • payments for goods and services;
  • bill payments;
  • pre-authorized payments (insurance, mortgage, rent, utilities, etc.);
  • transfers (between two account holders of the same credit institution);
  • transfers of funds by email (sending and receiving).

How do traditional and high interest savings accounts compare?

High interest savings accounts offer more interest on your balance than regular savings accounts – the extra amount will depend on the combination of features. For example, some high interest accounts offer a higher than average interest rate, but you must maintain a minimum balance. Others offer a more moderate interest rate and are less restrictive. There is no right or wrong choice, it all depends on your priorities.

High-interest savings accounts and traditional savings accounts have some things in common, such as:

  • Interest rate: Both types of accounts pay interest on the balance. High-interest savings accounts can earn you more than 1%, but other savings accounts don’t usually offer such a high rate. The high interest savings account I use pay me as much as 8% of my savings every month.
  • Interest tax : When you make money, you pay tax – it’s a fact of life. The interest you earn in your savings account is no different from your other income and will be taxed at the same rate. If you want to reduce the amount of tax you owe, you might want to consider other investment options
  • Insurance: You can have peace of mind knowing that your savings are safe in a savings account. The Deposit Insurance Commissions in many countries protects savings accounts with major banks, and coverage is free and automatic.
  • Availability: The longer the funds remain in your savings account, the higher the return, and you can use them if you need them. That’s because whether it’s a regular or high-interest savings account, you can withdraw funds whenever you want (however, you may have a limited number of free transactions each months, keep that in mind).

Saving Money is cool

Take your savings plan to the next level

High interest rates can certainly help you reach your savings goals faster, and while a high interest rate savings account strikes a good balance between security and return, it’s not your only option.
Just as it’s a good idea to diversify your investments, consider spreading your savings. Many Countries have access to excellent tax-sheltered savings programs, savings accounts and investment products. Here are some popular options you can combine to build your personalized savings strategy:

Tax-Free Savings Accounts (TFSA)

The Tax-Free Savings Account (TFSA) is not a traditional savings account: it can hold different investments (but also cash) and has contribution and withdrawal limits, but the interest you accumulate is not taxed.
TFSAs are very versatile – aside from regular cash deposits, they can hold the following:
• Investment Funds,
• Guaranteed Investment Certificates (GICs),
• Shares,
• Obligations,
• Exchange Traded Funds (ETFs).

In contrast, all market-linked investments are vulnerable to stock market gains and losses. So while you have the possibility of earning more interest, there is also the possibility that your TFSA balance will decrease if you have invested in mutual funds or ETFs.
Ultimately, it’s up to you – you can invest your TFSA savings according to your risk tolerance. Not sure how much risk you’re willing to take with your money? A financial planning expert can help you get started!

Registered Retirement Savings Plans (RRSPs)

A Registered Retirement Savings Plan (RRSP) is an account designed for retirement savings. Like a TFSA, an RRSP has an annual contribution limit and offers tax relief on your annual income (the exact amount of tax saved depends on how much you contribute each year).
Unlike those from a TFSA, withdrawals from an RRSP are taxable. So it’s a great idea to link your RRSP to an account that gives you easier access to your funds – especially if you think you might need to use some of your savings before you retire.

Guaranteed Investment Certificates (GICs)

Guaranteed investment certificates (GICs) are low-risk investments that are locked in for a set term – often a year or two, but no more than five years (or as little as 30 days). Interest on these accounts is generally taxable, unless the GIC is held in a TFSA.
GICs are a good compromise if you want to earn interest on your savings, but prefer to know exactly what you’re going to end up with instead of taking a risk. A GIC is also useful for more short-term goals, such as saving an annual lump sum to help you pay off your mortgage on an accelerated basis .

In summary

Thanks to the power of compound interest, a high-interest savings account is a great option for short- and long-term savings, but it’s only one part of a solid savings strategy. When you combine your savings account with investments that can reduce the amount of tax you owe, you might be surprised at how quickly your money grows.

READ MORE: HOW TO INVEST YOUR FIRST $1000

 

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