A savings account is a bank account where you set aside money to save for a significant expense or grow your wealth over time through interest earnings.
It’s also a great place to park your excess cash for use as a safety net.
4 Best High Interest Savings Accounts in Canada
How Does a Savings Account Work?
The purpose of a savings account is to enable you to store money for long-term goals and significant expenses, such as a vacation, home renovations, or your retirement.
However, a savings account is still a very liquid financial product.
You can withdraw your money at your discretion and without incurring a penalty.
Savings accounts are straightforward: you open an account, deposit funds, and your bank pays you interest on the balance.
Unlike a chequing account, you generally won’t receive a debit card that’s linked to your savings account to facilitate in-store purchases.
The reasoning is that your savings account serves to store your money rather than have it readily accessible for spending.
Still, many financial institutions give you the option to withdraw funds from your savings account when you use your debit card at a payment terminal.
You can perform many different types of transactions using your savings account, including:
- Bill payments
- In-store debit purchases
- Email money transfers
- ATM withdrawals
- Transfers to and from your chequing and investment accounts
Keep in mind, though, that your financial institution may impose restrictions on the number of debit transactions, email money transfers, and withdrawals you can conduct monthly.
Each savings account generates interest on your balance, but it’s lower than other types of investment products.
Suppose you’re looking to invest your money for the long term and want superior returns.
In that case, you should consider opening a registered savings account, such as a registered retirement savings plan (RRSP) or tax-free savings account (TFSA).
In addition to savings deposits, these tax-sheltered investment vehicles allow you to hold mutual funds, stocks, bonds, exchange-traded funds, and other assets.
Interest income earned from a savings account is taxable, so you’re obliged to report it on your tax return.
Your financial institution will send you a T5 form yearly that shows the amount of interest earned on your deposits.
However, you’re exempt from paying tax on accrued interest income if you hold your savings account within a tax-sheltered registered savings vehicle, like an RRSP or TFSA.
Did You Know?
The interest rate that your savings account earns isn’t fixed; instead, it fluctuates based on your bank’s prime rate.
Key Components of a Savings Account
Below is a table that explains the key components of a savings account:
|Minimum Deposit||The minimum deposit is the amount you must contribute to the account when you first open it.|
|Service Fees||Service fees vary by institution. Many don’t charge a monthly maintenance fee. However, transaction fees may kick in if you exceed your monthly limit, ranging from $1 to $5 per additional transaction. Excess money transfer fees that you send cost around $1 each.|
|Interest Rate||Varies greatly from digital only banks to big banks.|
|Minimum Balance||Most accounts don’t require a minimum balance.|
|Debit Transactions and Email Money Transfers||Some accounts restrict you to a certain number of free debit transactions (as low as one per month) and email money transfers each month, while others set no limits.|
Advantages of Savings Accounts
- An excellent way to control your spending and instill disciplined savings habits
- You have money at your disposal should you have to pay for a significant, unexpected expense
- You earn interest on the money sitting in your account, which compounds monthly.
- A safe and secure place to store your excess funds – you benefit from protection by the Canada Deposit Insurance Corporation (CDIC) for up to $100,000 in combination with your chequing account and term deposits.
Disadvantages of Savings Accounts
- You may earn a paltry rate of interest compared to other investment products
- To earn a high-interest rate on your money, you may have to maintain a large balance in your account
- You may face strict limits on the number of free debit transactions and transfers you can perform monthly
A savings account that advertises an exceptional interest rate (2% or higher) could be a promotional offer that lasts only for a brief period of a few months before reverting to the lower default rate.
Types of Savings Accounts
Several different types of savings accounts are available to choose from in Canada:
1. Standard Savings
This is a plain vanilla savings account that offers a convenient way to store your surplus cash and make withdrawals as necessary.
Typically, it pays a low-interest rate and provides few perks.
2. Joint Savings
A joint savings account is one held in the name of two or more people.
Each bears responsibility for the account.
3. High-Interest Savings
These premium savings accounts yield considerably higher interest rates than those found on a standard savings account.
4. Registered Savings
A registered savings account is held in a government-sponsored savings plan, such as an RRSP or TFSA.
The preferential tax treatment differentiates these from a regular, unregistered savings account.
For example, with a TFSA, your interest income is non-taxable when you withdraw it.
5. Youth Savings
These savings accounts are geared toward people under 18 years of age.
Usually, there are no transaction fees but lack the generous interest rates that high-interest savings accounts offer.
6. US Dollar Savings
You can use this savings account to store USD that you own.
This is a convenient way to diversify your cash holdings or keep American dollars easily accessible until needed, such as a vacation south of the border.
How to Open a Savings Account
Opening a savings account in Canada is straightforward.
You can complete the process in less than an hour at your bank’s local branch or at your own pace through their online banking portal.
Generally, you’ll need to provide the financial institutions with two pieces of government-issued identification, such as a Canadian passport, driver’s license, or birth certificate.
Suppose you don’t possess two of these document types.
In that case, your bank may accept an employee ID, a credit card that bears your signature, or even someone who can vouch for your identity who’s also a long-time customer of the bank.
In addition to the necessary documents, you may have to fill out an application to supply some personal details, including your social insurance number.
As a final step, you may need to deposit a minimum sum of money into the account once it’s set up.
Frequently Asked Questions
- What is a good interest rate for a savings account?
It would help if you aimed for a savings account that pays at least a 1% interest rate. The higher the rate a financial institution offers, the better, as your funds will grow at a faster pace and be better insulated from inflation.
You’re likely to find rates 1% and higher on premium or high-yield savings accounts, especially those offered by financial institutions that operate exclusively online. A great example is EQ Bank’s Savings Plus Account
- Should I open a savings account?
It’s wise to open a savings account for many reasons, provided you have a surplus of cash available to deposit periodically:
- It allows you to set aside money to pay for considerable future expenses, such as a vacation or down payment for a home.
- It’s a convenient and safe place to store cash for financial emergencies.
- You’ll earn interest on your balance, helping to preserve your money’s purchasing power and grow your wealth over time.
- How much money should I keep in a savings account?
There’s no exact amount of money you should keep in your savings account – it varies from person to person.
Instead of pondering the optimal balance, outline your reasons for opening the account and what you hope to achieve through your savings.
Once you’ve identified your goals, you can calculate the amount you need to deposit each month and for how long.