If you’re looking to put some money away for a future purchase such as a vacation, down payment, or a special occasion you may consider depositing your money in a savings account.
If you’re not sure what savings accounts are and how they work, read on.
A savings account can help you save money by providing you a place to store funds while earning interest. Savings accounts gives you access to your funds at anytime and helps you keep track of your progress towards your savings goals. Comparing savings account offerings is important as most accounts offer different interest rates and fees.
The interest rate is quoted as an annual rate and is how banks reward you for keeping your funds in their institution. Typically, the amount of interest earned is calculated on your total daily closing balance and is paid monthly. Each bank offers different interest rates with variations among their own savings accounts. Depending on the institution and the savings account, the interest rate provided could be a:
- Flat rate—This is an interest rate that remains the same no matter how much money you have in your account.
- Promotional rate—This is an interest rate typically used to entice people to open a savings account as it’s significantly higher than traditional flat rates. However, promotional rates come with varying conditions. Some are only for a set time period while others are only offered on new deposits or are available if you have a minimum account balance.
- Tiered rate—This interest rate is dependent on the amount of funds you have in your savings account. The higher your account balance is, the higher the interest rate you’ll receive. However, the interest earned has a more complex equation as it’s the sum of the portion of your balance in each tier multiplied by the respective tier’s interest rate. In an account with two tiers, the interest is calculated as follows: (balance in tier one × tier one interest rate) + (balance in tier two × tier two interest rate).
When searching for a savings account, make sure to compare a bank’s savings account offerings to other provider’s offerings. Comparing high-interest savings accounts is the best way to ensure you’re getting the highest interest rate possible on your funds.
Unlike most chequing accounts, savings accounts don’t charge monthly fees. However, as savings accounts are designed for deposit purposes, debit transactions usually result in fees. Some banks offer a fixed number of debit transactions for free. This number can usually be increased by increasing the amount of funds you have in your account.
The Canada Deposit Insurance Corporation (CDIC) is an important organization to discuss when looking at the deposit industry in Canada. The CDIC provides insurance for eligible deposits up to $100,000 per depositor per insured category. This ensures your funds are protected and you don’t incur a financial loss if a CDIC member institution fails. Funds which are in chequing accounts, savings accounts or invested in GICs (with maturities of five years or less) are just some of the deposits which are insured by the CDIC. The CDIC is able to provide this security by charging CDIC member institutions premiums to cover the cost of insuring your deposits.
Savings accounts vs. GICs
GICs are an investment product in that preserve your savings and earn a guaranteed rate for a specified time period. With these investments, interest payment frequencies can vary and can be monthly or annually. One of the main differences between GICs and savings accounts is that depending on your GIC you may not have access to your funds until it matures. With a non-cashable GIC, your funds are locked in for a specified period. But a cashable GIC provides you access to your funds. Additionally, GICs typically provide a higher interest rate compared to savings accounts. Be sure to compare interest rates of GICs to savings account to determine which is right for you.
The bottom line
Savings accounts can help you reach your financial goals by providing you interest on your funds. Therefore, make sure you look at the features of different accounts and shop around for the best one to help you meet your savings goals.
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