Having a regular savings account means you’ll earn little interest. But if you choose a high-interest savings account offered by a smaller financial institution, you can earn a lot more interest.
As of Sept. 23, 2018, you can earn up to 46 times more interest by choosing a different financial institution. On a $10,000 deposit, for example, you can earn $230 in a year if the interest rate is 2.3% (currently offered by EQ Bank). If you choose an account with a rate of 0.05%–which many of the big banks offer on their typical savings account—you’ll only earn $5 on a $10,000 deposit after one year.
You may be wondering why some financial institutions offer such a great rate while others don’t. The smaller ones don’t have huge operating costs because they have no branches or just a few and they have to compete for your business. On the other hand, big banks have much higher operating costs because they have hundreds of branches across the country and large advertising budgets. They also have such a large share of the market that they don’t really need to have high rates as much as their smaller competitors.
If the money you earn in a high-interest savings account isn’t enough, you can always choose to purchase a GIC instead. The rates are much better if you get a long-term GIC (one or more years) versus a short-term GIC (less than one year).
Keep in mind that the money in a GIC isn’t as easily accessible compared to money in a high-interest savings account. With redeemable GICs (also called cashable GICs), you can take the money out whenever you want, but the rates are not as great. However, with non-redeemable GICs (also called non-cashable GICs), the rates are great, but it’s difficult to access your money.
Let’s see how much interest you’ll earn with a high-interest savings account, a regular savings account, a redeemable GIC, and a non-redeemable GIC. We’ll assume a deposit of $10,000 and an interest rate of 0.05% for the regular savings account, 1.15% for the redeemable GIC, 2.3% for the high-interest savings account, and 3.25% for the non-redeemable GIC. Both GICs have a one-year term.
As you can see, choosing a regular savings account is a horrible decision. You’ll make 23 times more money by choosing a redeemable GIC, 46 times as much by choosing a high-yield savings account, and 65 times more money by choosing a non-redeemable GIC.
Over time, the difference adds up. Let’s assume the rate on all products stays the same and any interest earned is reinvested. In other words, you’ll earn interest on interest, which is called compound interest.
Again, the amount of interest you’ll earn with a regular savings account is minimal. You’ll earn 23.5 times as much with a redeemable GIC, 48.1 times more money with a high-interest savings account, and 69.3 times as much with a non-redeemable GIC.
The bottom line
Choosing the right savings account can make a big difference in the amount of interest you earn in both the short and long term. Before deciding whether or not to put your money in a savings account or GIC, be sure to do some research and find the best rates available.
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