Tag Archives: Savings accounts

Financial Goals – What It’s All About

financial-goals

What am I saving money for?

For myself, this is the most important of all financial matters to get right. If I didn’t have a financial goal, I would simply lack the motivation to save. Having a goal constantly reminds me of what I’m working for, and gives me a light at the (far) end of the tunnel. To me, it is the most reassuring thing to think about after a rough day, knowing a plan is in place, and underway and that I’m not simply spinning my tires.

As I mentioned in my first post, my personal financial goal is to become financially independent as soon as possible. How will I be financially independent? I will be living off the the interest of my savings! The S&P 500 has a long term annual return of 12.65%. If you had $1,000,000, that would be $126,500 in interest a year! Of course, once you factor in inflation, fees and taxes, you would be looking at a more modest, but still ample, return.

My goal helps me in more ways than giving me a sense of purpose, it also helps me know where to put my money. The S&P 500 is a great long term (at least 5 years) investment, which is what I need for my personal financial goal.

But what if your reason to save money is more short term? What if you are saving up for a down payment on a house, or something that will require you to spend your money within 5 years?

The S&P 500 is pretty safe as far as stock investments go. But it still has its down years, like 2008, the year of the great recession. Had you invested at the end of 2007, it would have taken 5 years for the S&P 500 index to grow back to the price you bought it at.

If you are investing for the short term, that probably means you have something fairly specific in mind you want to buy (house, car, vacation, etc). If you say “I want to save up $100,000 for a down payment on a house in 5 years,” you may value the added certainty of knowing your money will be there in 5 years with a little bit of interest accrued, rather than be less sure your money will be there in 5 years, but with more interest accrued. The cost of safer investments is a lower return, and is a cost worth bearing if you are looking for a more short term place to invest your money.

For shorter term investments, I suggest looking at government bonds, GICs, or even a high interest savings account. There are also many safe mutual funds and Exchange Traded Funds (ETFs) that will also achieve the same effect. They will not grow your money much, but they are very safe. The small amount they grow is better than nothing. Having anything offset the constant encroachment of inflation is important. And if you need a place to stash your cash short term, these are great savings options.

 

 

Savings Accounts – The Usual Suspects

usual_suspects

So, because of inflation, we know that we can’t just leave our money in a regular savings account. Your money does grow slightly in a typical savings account, usually by less than 1%, which is barely better than nothing, but still better than nothing.

Why do banks give you any interest on your saved money at all? It’s because they want you to put your money with them. Banks don’t just sit on your money and keep it safe, they invest it in their various business endeavors (typically mortgages and other types of loans) and take whatever return on investment (ROI) for themselves, which will be much higher than 1%. So it’s in their best interest to have people save money with them so that they can invest it into something that offers them a better return than 1%.

Banks are required to keep a certain amount of cash on-hand, but given that most people keep their savings with their banks and rarely make significant withdraws, they don’t need all your cash on-hand as only a very small percentage of deposits are withdrawn on a regular day. Of course, if times get tough and trust in banks or the economy plummets, people will want their money in their hands and withdraw their savings at the same time as everyone else. That creates a major problem, as Greece experienced with their recent election, where the banks simply didn’t have enough money to give to people. But don’t worry, in Canada, if such a thing were to happen, the Canadian Deposit Insurance Corporation (CDIC) will cover you up to $100k per account with tax payer’s money (though I’m not sure how that would work if the Canadian government was out of money too).

Some banks have a high interest savings account, which is usually under 1%. The various savings rates are usually dependent on how much money you have with a bank, here is a breakdown of some of the banks’ current savings rates:

  • TD
    • Savings interest rates: 0.1% – 0.8%
    • If you have less than $5000, your savings will grow by 0.1% per year
    • If you have more than $5000, your savings will grow by 0.15% per year
    • If you have more than $5000 in TD’s High Interest Savings Account, your savings will grow by 0.8% per year
    • If you’re a youth with less than $5000, your savings will grow by 0.05%
    • If you’re a youth with more than $5000, your savings will grow by 0.15%
  • CIBC
    • Savings interest rates: 0% – 0.85%
    • If you have less than $5000, your savings will not grow
    • If you have more than $5000, your savings will grow by 0.85% per year
  • RBC (Royal Bank of Canada)
    • Savings interest rates: 0.05% – 0.75%
    • If you have less than $5,500, your savings will grow by 0.05% per year
    • If you have less than $5,500 to $25,000, your savings will grow by 0.1% per year
    • If you have more than $25,000, your savings will grow by 0.2% per year
    • If you have a Tax Free Savings Account (TFSA), your savings will grow by 0.75% per year
  • Scotiabank
    • Savings interest rates: 0.1% – 1.3%
    • If you have less than $5000, your savings will grow by 0.1%
    • If you have $5000 – $25,000, your savings will grow by 1.15%
    • If you have more than $25,000, your savings will grow by 1.3%
  • Tangerine (formally ING Direct)
    • Savings interest rates: 1.05%
    • Tangerine has many kinds of accounts, but their savings account seems to offer 1.05% to everyone

As you can see, it’s pretty tough to get much more than 1% interest on your savings at any bank or financial institution. To make it more difficult, the range in savings rates depends on how much you invest, CIBC gives you no interest for any savings that total less than $5000. To get a savings growth rate of 0.2% at RBC, you need $25,000 deposited with them.

I have mentioned how inflation makes everything cost more every year. Over the last 15 years, the average annual inflation rate has been 1.97% per year, which is significantly higher than any of the interest rates any bank will give you to grow your money. This means that even if you had money in any of these bank’s savings accounts, your money would still lose about 1% to 2% of its value every year.

What this boils down to is that in Canada, you effectively lose money every year when it’s in any savings account. Banks still want you to invest with them though, they regularly offer incentives to lure your money into their accounts, usually with a limited time ‘high’ rate of return, currently between 2.5% and 3%. But buyer beware, those rates only last for a few weeks, then you are back on the regular low rates.

So what’s the solution? How does one protect the value of their money?

Let me answer with another question: How do rich people grow their savings?