What is a Savings Account?

When it's time to save, and you want to earn interest, savings accounts are the best option. If you’re looking to access money for day-to-day transactions, chequing accounts are ideal. 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.

What is a savings account?

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 for 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 device, 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.

Some savings accounts, however, have no monthly fees, e-transfer or online transaction limits or fees and no minimum account balances, like the following accounts:

• Simplii Financial High Interest Savings Account
• Tangerine Savings Account
• Neo Everyday Account
• Wealthsimple Spend (technically a high-interest chequing account)
• EQ Bank Personal Account (hybrid chequing and savings account)

What types of transactions can you perform?

There are a number of different transactions you can perform with your savings account, including:

• Deposits (cash and cheques)
• Withdrawals (at ATMs and bank tellers, but remember that many banks will have limits on the number of withdrawals you can do in a month)
• Point-of-sale debit purchases (although you could be limited to a certain number of transactions)
• Bill payments (although you could be limited to a certain number of transactions)
• Transfers (between two users of the same institution)
• Interac e-Transfers between two users of different banks or financial institutions (both send and receive)

Summary of savings account fees

Depending on which savings account you choose and how you use it, you may have to pay any number of small fees. These include:

Tax implications of savings accounts

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 earn 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 or other tax-sheltered account like an RRSP or a TFSA.

The one downside of using a 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 2.90% 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.

Why you should open a savings account

While basic 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%-1.90%. Again, it may be smart to choose a savings account with an online bank because they tend to pay higher rates on savings accounts than major banks.

If you have extra money that you don’t need for essentials, there’s no need to put it in a chequing account. You can earn some interest to grow your money further 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.