Cash is an important part of any investment portfolio as are stocks and bonds. If you’re going to hold cash in your portfolio, you shouldn’t settle for a low interest rate.
Here are five reasons why you should have a high-interest savings account:
1. Get guaranteed returns and protect your principal
While mutual funds, bonds, and stocks offer the potential for higher returns, the returns aren’t guaranteed. Besides GICs, there aren’t many other investment options where you’ll get a guaranteed return on investment. While interest rates aren’t very high, you’ll still get a better rate of return than you would with a regular savings account.
If your money is held by a financial institution that’s a member of the Canada Deposit Insurance Corporation (CDIC), up to $100,000 of your savings is guaranteed in the event your financial institution were to fail. Although credit unions and caisses populaires aren’t covered by the CDIC, deposits are protected by provincial corporations or non-government insurers. Your principal isn’t guaranteed if you buy stocks, bonds, or mutual funds.
2. Easy to access
Money in a savings account is easy to access. With a GIC, the money’s locked in for a specific period of time. While you can take out the money early, you might need to pay a penalty depending on the type of GIC you buy. If you sell a stock, it may take a few days to get access to the cash.
3. You can shelter interest income
A high-interest savings account will produce interest income. But if you don’t want to pay tax on the income earned, you can set up a TFSA savings account. Let’s assume you have $10,000 and can earn 1.8% in a non-registered high-interest savings account or in a TFSA savings account. If you save the money in a non-registered account, live in Ontario, and pay a marginal tax rate of 43.41%, you’ll owe $78.14 in taxes after one year. If you save the money in a TFSA savings account, you won’t owe any taxes.
|Non-registered account||TFSA savings account|
4. Create an emergency fund
An emergency fund will help cover the unexpected, You could lose your job, owe money to the Canada Revenue Agency, or need to make repairs to your home or car. Having an emergency fund will keep you from dipping into your retirement savings or going into debt. It’s better to be prepared for life’s little financial surprises.
5. Save up for a buying opportunity
If there’s a particular stock you want to buy and waiting to buy when it declines, a high-interest savings account is a great place to park your cash for the time being. It’s always good to have some cash lying around to take advantage of buying opportunities when there’s a market downturn.
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Flickr: KMR Photography