One of the most important factors affecting how fast your money will grow is the interest rate charged on your bank account. Knowing how to understand your interest rate and the impact it has on your money is critical to finding the right account for you.
Interest rates have a major impact on how your money will grow, and they’re constantly changing. In the wake of the 2008 recession, average interest rates in Canada dropped and held steady at a fairly low rate.
When interest is calculated, when it’s paid out and whether interest is compounded or simple will all be determining factors when comparing rates. Compound interest means that you accrue interest both on the money you put into the account and on the interest you’ve already earned. Whereas, simple interest means you only earn interest on the money you put into the account – that balance is never updated to include interest you’ve already earned.
How are interest rates calculated on my account?
Interest is calculated by this formula: Daily closing balance/365 x Interest rate/100″
If you are comparing high-interest savings accounts and wondering about the significance of having the interest calculated daily and paid monthly, it basically means you will earn more interest.
The base rate. The standard interest rate is where your comparison should start. Check to see if it is variable or fixed and how it compares against other savings accounts.
Introductory rates. Some banks will offer an introductory rate on a savings account. Check to see how long that rate is in effect, and if you need to meet any requirements in order to maintain it. Compare both this rate with the account’s standard rate — if you can find a higher standard rate on another account, you could be better off in the long term.
Compound interest. Ideally you want a high-interest savings account where interest is calculated daily and paid into the account monthly. This allows you to grow your savings faster by being paid for interest that you have already earned.
Terms. Check to see if the interest rate is only applied if you are able to meet certain conditions, such as maintain a minimum balance or make a limited number of withdrawals.
Flexibility. Interest rates are predicted to keep going up for a while longer, which means that if you are locking in a Guaranteed Investment Certificate (GIC) account, look for an interest rate that isn’t going to be exceeded by those of online savings accounts in the next few months. Or choose a GIC that lets you upgrade your interest rate or withdraw for an early exit to a better investment option.
Interest rates are not the only important feature for a savings account. When making your comparisons check for:
Linked account. Some savings accounts need to be linked to a chequing account in order to facilitate the transfer of funds. Check to make sure that by opening a savings account at a different bank, you can still link it to your current chequing.
Introductory rates. An introductory interest rate can give you a big boost toward meeting your savings goals.
Security. Ensure that the financial institution is insured by the Canada Deposit Insurance Corporation (CDIC), so you’re safe if the bank fails.
Fees and penalties. Certain monthly fees could apply to savings account products as well as penalties for making too many withdrawals. Read the fine print carefully to make sure that extra fees aren’t eating your savings.
Balance requirements. You might be expected to open the account with a certain amount of funds, or have to maintain a minimum balance in order to avoid fees.
You could easily fail to reach your savings potential by not weighing the type of savings account and the interest rate carefully. In order to avoid this, make sure that you are:
Choosing the right account. If you are savings towards a goal that is a few years off, you’ll get a higher return with a GIC than with a savings account.
Not mistaking an introductory rate for the standard. Check the advertised rate carefully, as this may just be a limited-time promotion. The standard rate is what will be applied after the promotional period ends.
Finding the right savings account can feel overwhelming, but a high interest rate coupled with low fees will help your savings grow. Take your time to compare rates, balance requirements and linked chequing accounts. Then open your account and start saving.
Common questions about interest rates
Fees are the biggest factor and can be charged on the savings account itself or on any account linked to it. Other costs to consider are penalties for early withdrawals as well as bank transaction fees.
With some accounts the rates will be different depending on how much money you have in savings. Some banks will also charge you fees if your balance dips below a certain threshold, so ask about any balance requirements before opening an account.
Interest is typically calculated daily and paid into your account monthly. The more often you receive payouts, the faster your money will grow.
Shirley Liu is Finder's global program manager. She was previously the publisher for banking and investments and has also written comparisons for energy, money transfers, Uber Eats and many other topics. Shirley has a Master of Commerce and a Bachelor of Media, Journalism and Communications from the University of New South Wales. She is passionate about helping people find the best deal for their needs.
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