Have you ever seen the show Hoarders? It depicted the real-life struggles and treatment of people who suffer from compulsive hoarding disorder. The kind of person profiled on Hoarders could not bring themselves to throw virtually anything away, and his or her house would be a gigantic mess as a result.
Compared to that kind of hoarding, cash hoarding is not nearly as bad for you. But from an investment perspective, it’s certainly not ideal. Let’s look at some of the ways to have the security of cash while maximizing your interest.
Many people like to have a large amount of cash on-hand, and this isn’t necessarily a problem. Cash provides a rainy day fund if something comes up, and it means you don’t have to sell long-term investments, like stocks or bonds, in order to be more “liquid”.
The problem is that, over time, cash in a regular chequing or savings account earns very little interest, if any at all; this results in a huge opportunity cost as you forgo interest you could have made elsewhere. Your purchasing power will also decline, as a result of inflation, so you are really losing money the longer you hold on to the cash.
What should you do instead? While you may want to keep a small amount in your chequing/regular savings account for the sake of easy access to funds, here are 3 alternatives to plain old cash:
1. Guaranteed Investment Certificates (GICs)
If you happen to have a large amount of money just sitting in a savings account earning 0.1% interest (or even less), moving it to a GIC is one solution. A 2-year redeemable GIC at Industrial Alliance currently pays 1.10% interest. Will that make you rich? No. But, as they say, you’re leaving money on the table if you leave it in a regular savings account. Non-redeemable GICs tend to pay higher rates of interest because you’re making a commitment to lock-in your money for a specified period of time. But give some thought as to whether you might need the funds back, before the end of the term. If you think you will, a redeemable GIC may be the better option.
2. High-Interest Savings Accounts
Not to be confused with regular savings accounts, high-interest savings accounts actually pay a decent amount of interest. The big banks pay 0.80-1.05%, but if you look elsewhere, you can find higher rates. Meridian Credit Union, for instance, currently offers 1.60% on its high-interest account. For most of these accounts, the catch is that the number of free transactions you have per month is very limited. Once you exceed that number, you can get hit with costly transaction fees. Translation: Use these as savings accounts and not as day-to-day use accounts.
3. Government Savings Bonds
You’ve probably seen the ads for either Canada Savings Bonds (CSBs) or Canada Premium Bonds (CPBs). These bonds are legal liabilities of the federal government but, because they are considered very safe, the interest rate is pretty low. For a 3-year term, CPBs pay interest of 1.00% for year 1, 1.20% for year two and 1.40% for year 3. They’re not available for purchase year-round (CSBs can be purchased through employers and taken off paycheques and CPBs can be purchased from early October to December 1). On the plus side, CPBs are cashable at any time.
In the show Hoarders, they do interventions to try to help people let go of all the stuff they’ve been needlessly holding onto. This post is an intervention of sorts for all you cash hoarders out there. It’s good to have lots of cash, but it’s even better to have that cash making you some money rather than just sitting in an account paying nothing.
Flickr: Anita Hart