Key takeaways
Overpaying debt or a mortgage usually beats saving
If you have debt, it's always best to clear it before saving. As a simple example, $1000 in a savings account could earn up to $50 per year. Whereas $1000 debt on a credit card with an APR of 18.9% costs $189 per year. Clearing the debt with savings would mean you are $139+ better off.
If you have a mortgage, you could use the savings to overpay and reduce your debt. Read our overpaying guide to find out more.
Understand when you will need access to your cash
If you need access to your savings in the short-medium term, then an account that lets you make regular withdrawals would be best. There will be a limit on the number of withdrawals you can make and the interest rates tend to pay lower.
If you are happy to save your money for a set amount of time, then a High Interest Savings Account (HISA) with a fixed interest rate over a fixed period of time would be wise. You'll earn a set amount in that fixed time period, but withdrawing cash may be limited and could result in penalties.
Look out for introductory rates
These "promotional" temporary interest rates are an incentive to attract new customers. They can be a good thing where you earn a guaranteed rate during the introductory period. Look out for these offers but think about switching or changing once the introductory period ends as the ongoing interest rate could be quite low.
If you’re saving for kids, a children’s account may pay better
It's worth looking at a youth savings account for children under 18. This is like an adult savings account and may offer free transactions; no minimum balances; and some banks offer these accounts without a fee. You may even find that the interest rates offered may be better than the adult savings account.
Use different accounts to maximize benefits
If you have a large amount to save, you should think about opening several different savings accounts. As an example, if you had $20,000 to save but you need to use $5000 in three months' time, you could put the $5000 into a simple savings account. The remainder could go into a High Interest Savings Account (HISA) that has a fixed interest rate with limited withdrawals.
What is a savings account?
A savings account is a bank account that pays interest on the money you deposit in it. They act like a holding place for your spare cash and are not meant to be used for day-to-day banking, like a chequing account.
The more money you have in your savings account, and the longer it stays there, the more interest you can earn. Interest rates on savings accounts are relatively low though, and are best for short term goals like a vacation or new car.
Note that any interest earned in a savings account is considered taxable income. The exception is if your money is held in a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
Your savings are protected up to $100,000 per CDIC (Canada Deposit Insurance Corporation) member. So if your financial institution fails, and they are a CDIC member, then the CDIC will pay you automatically. This insurance applies to chequing, savings, GICs to name a few. You can find out more from the CDIC about the coverage available to you.
How does a savings account work?
Simply, you either deposit or withdraw money. You can usually make deposits whenever you want. But there may be limits for the number of withdrawals you can make; if you go over the limit you’ll likely be charged a fee. Using a savings account for purchases or other transactions may also incur a fee.
The interest you earn on savings accounts is usually compounded. This means you earn interest on your initial deposit and any interest you earn afterwards. By earning on interest on the interest, your savings will grow quicker!
You do need to understand how often that interest is compounded though. Depending on the account you choose, it could be monthly, yearly, perhaps even daily. The more frequently the interest is compounded, the faster you will earn money.
Also note that some savings accounts may have a minimum deposit amount to earn interest.
Saving account types
There are many different types of saving accounts available to you. They offer different features based on your life and banking needs.
| Basic savings account | Usually this type of account gives you a bit of interest on your savings. Limitations will include number of withdrawals but it should be relatively easy to access your money. |
| High Interest Savings Account (HISA) | This account works the same as a basic savings account but offers higher interest. The limitations are much higher with even less withdrawals, though your money is still easy to access. This is a great option for medium-term goals. |
| Youth savings account | These accounts are usually for Canadians up to age 18. The accounts will vary by provider, but typically offer free monthly transactions, no minimum balances and have no or small fees. |
| USD savings account | This account is the same as a basic savings account, but is held in US Dollars. |
| Tax-Free Savings Account (TFSA) | A TFSA is a registered investment or savings plan for Canadians aged 18 or older. Interest and investment earnings in a TFSA compound without being subject to income tax. Withdrawals are not taxed either. |
| Registered Retirement Savings Plan (RRSP) | An RRSP is a savings plan that allows you to save and invest for your retirement. Taxes on your contributions and earnings are deferred until you withdraw money from your plan. |
How to open a savings account?
Opening a savings account can be done in person at your chosen provider or online. If you open your account in person, you will likely need 2 pieces of photo identification. You will also need your SIN (social insurance number). Once the account is opened, you can use it immediately.
How inflation and deflation can affect your savings
Inflation is the measure of the rate at which prices increase. To understand how well your savings are doing, you need to look at it compared to the rate of inflation. For example:
Let’s say inflation is 5%. Things that cost $1 this year will then cost $1.05 next year. If you have $1 in a savings account at 1% interest, by next year it will have grown to $1.01. So saving has reduced your spending power by 4 cents a Dollar.
You then have the flip side when sometimes prices drop and what is known as deflation or negative inflation. This can be positive for savings. For example:
Let’s say inflation is -2%. Things that cost $1 this year will then cost 98 cents next year. If you have $1 in a savings account at 1% interest, by next year it will have grown to $1.01. So saving has increased your spending power by 3 cents a Dollar.
If a savings account is paying less than the rate of inflation, then it is losing you money. Given the inflation numbers we have seen recently, it would be hard to find a savings account that can match it.
FAQs
Why would I use a savings account?
It's best to think of a savings account as money for a short term goal or as an emergency fund. You'll earn interest on your savings until you need it, and it's safe and easy to use should you need to withdraw from it.
Should I use a savings account for retirement?
For long-term savings, such as retirement, then it's better to look at a TFSA or RRSP. These investments will provide greater returns over a longer time and your earnings will be protected from income tax.
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