There’s a definite upside to having a high-interest savings account. Compared to a regular savings account, the interest you earn is simply much greater. In fact, while regular savings accounts typically pay anywhere between 0.05% and 0.50% in interest, it’s not difficult to find high-interest accounts that pay more than 1%. You won’t strike it rich but it’s better than nothing.
However, savers need to be mindful of the fees that can come with high-interest savings accounts. These charges can really add up, especially if you make a significant number of transactions. In the process, fees can meaningfully eat into the excess interest you’re receiving.
Take the TD Canada Trust High Interest Savings Account, for example. While the bank waives transaction fees for account balances of $25,000 or more, there are hefty charges for people without this amount in their accounts. Each debit transaction (withdrawal, transfer, debit payments, cheques, and pre-authorized payments) costs $5 and there are no included transactions. So every time you make one of these transactions, you’ll pay for it. Only deposits aren’t subjected to fees.
To see how much of an effect these fees can have, let’s imagine you deposit $10,000 into the account. For the sake of simplicity, we’ll assume the balance remains constant throughout the year.
TD actually has one of the lower high-interest savings rates, coming in at 0.55% currently. So on a balance of $10,000, you would earn $55 in interest annually. (Importantly, you won’t earn any interest if your balance is below $5,000).
That’s decent, but now let’s say you make two debit transactions a month. These could be anything from using your debit card at the grocery store to taking money out of a bank machine.
Two transactions will cost $10 per month or $120 annually. In other words, that’s more than double what you’ll receive in interest! On a net basis, you will actually lose $65 annually.
There are two main lessons here. First, it’s important to refrain from using high-interest savings accounts to make a lot of transactions unless you don’t have to pay for them. The best way to use them, from the saver’s perspective, is to just deposit money into these accounts and let the interest accumulate. The wrong way is to make a whole bunch of transactions that aren’t included (some banks include a specified number of withdrawals and transfers per month). Ironically, if you make too many transactions that aren’t included, your high-interest account will end up paying the bank more than it pays you.
Second, remember to shop around to make sure you’re getting the best rate available. If you compare high-interest savings accounts, the best-paying account in Canada at the moment is EQ Bank, which pays 2.25% (it also comes with unlimited transfers and unlimited e-transfers). Finding the best rate will help your savings grow faster and if you do have to make debit transactions, you probably won’t lose the interest earned in the process.
There is, of course, a broader message here. When it comes to saving and investing, you need to keep your eye on fees. It’s the reason why many experts suggest owning low-cost index funds over much-pricier mutual funds. It’s also why you might as well own a GIC over a savings bond (the interest is better and the risk is the same).
By all means, open a high-interest savings account. Just find the top rate and don’t use it as your main account for making transactions. Because if you withdraw money every week, you might as well be writing a cheque to the bank itself.
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Flickr: KMR Photography