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When people need access to money for day-to-day transactions, chequing accounts are ideal. However, when you decide its time to save some money, and you want to earn interest on it, savings accounts are the better option. Here’s a quick look at how savings accounts work, what their associated fees are and how you can choose the best one for you.
A savings account is a bank account that pays you interest in exchange for depositing money and maintaining a balance in the account. Savings accounts are not meant to be used to perform your day-to-day transactions; instead, they are meant to serve as a short-term investment vehicle, for you to deposit some money and earn a little interest on it. For example, you may use a savings account to save up for a big purchase, such as a new electronic, a piece of furniture or a trip.
With most savings accounts, you can deposit and withdraw money whenever you want; this can be done at any bank branch, ATM, online or via email money transfer. However, depending on which account you choose, you may be restricted to a small number of transactions each month, which means you’d want to perform transactions only as often as was absolutely necessary. If you go over the limited number of transactions your account offers, you may be dinged with a fee.
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Here’s the fun part: there are so many different types of savings accounts available in Canada to choose from. A basic savings account is typically free, but may only include a few transactions per month. If that doesn’t suit your needs, you can usually pay a monthly fee and choose a savings account that comes with more or unlimited transactions.
If you’re young and/or a student, you may want to compare some of the youth savings accounts and student savings accounts available. These accounts typically come with no or low monthly fees, and are a great tool to help you learn how to budget and be responsible with your money. On the opposite end of the spectrum, there are savings accounts for seniors, which also come with no or low monthly fees.
If you have long-term savings goals, you may want to look at some of the registered savings accounts available, such as registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs). And for business purposes, you can also use a business savings account and/or US savings account to your advantage.
There are a number of different transactions you can perform with your savings account, including:
Depending on which savings account you choose and how you use it, you may have to pay any number of small fees. These include:
|Fee||What is it?||How much?|
|Monthly Fee||In order to use some savings accounts, you may need to pay a monthly fee to the lending institution you open the account with||Anywhere from $0-13.95 per month, for basic to unlimited savings accounts|
|Additional Transaction Fee||If you have a limited number of transactions included in your savings account plan, you may be charged a small fee per each additional transaction you go over||Typically $1-2 per additional transaction, but can be as much as $5|
|Email Money Transfer Fee||To send an email money transfer to someone, you will be charged a small fee; it’s free to receive email money transfers sent by someone else||Typically $1-2 per transaction|
|Non-Bank ATM Withdrawal||When you withdraw money from an ATM attached to another lender (not your own), you are usually “dinged” with a fee||Typically $1.50-2.50 per transaction, $3-5 for ATMs outside Canada|
|Monthly Statement Fee||To encourage more clients to go paperless, many lending institutions charge a small fee to print/send a copy of your monthly statement in the mail||Typically $2-5 per month|
|Interim Statement Fee||If you want to get a statement at any time throughout the month, you’ll have to see a bank teller and pay a fee to have it printed||Typically $2-5, but sometimes free|
You aren’t likely to make significant amounts of interest in a savings account but, even so, you must know that the interest you do make will be fully taxed by the Canada Revenue Agency. In other words, you will be taxed at whatever your marginal tax rate is (as opposed to say, eligible dividends or capital gains, which are more tax-friendly). The one exception to this are savings held in a tax-free savings account.
Savings accounts do pay some interest but, as we mentioned above, it’s not very much. More importantly, the interest paid on savings at major Canadian banks does not come close to keeping pace with the rate of inflation experienced by consumers. Here’s why this is important.
If the Consumer Price Index (a measure of inflation) is rising by 2.00% a year, but your savings are only earning 0.25%-0.35%, your purchasing power is going down. Say you put $100 in a savings account that earns 0.35%. After one year, the account will be worth $100.35, assuming you don’t incur any fees. But consumer items that cost $100 the previous year will now cost $102. Over time, putting your money in a savings account that doesn’t keep pace with inflation can meaningfully reduce your spending power. As a result, it’s important to consider alternatives that offer higher returns, like high interest savings accounts, GICs, stocks and bonds.
While savings accounts do not typically pay a high rate of interest, it is better than the rates offered with chequing accounts. Currently, major Canadian banks pay 0% interest on chequing accounts, whereas savings accounts can pay between 0.25%-0.35% .
If you have money that is surplus to your day-to-day requirements, there’s no need to put it in a chequing account. You can earn a little something extra by opening and depositing it into a savings account, instead. Doing so does have some advantages compared to the alternatives: there’s no risk in a savings account because your money is CDIC-insured, and unlike a guaranteed investment certificate (GIC), your money is not locked in and there’s no minimum amount to deposit. All of this provides meaningful flexibility.