Savings accounts are bank accounts that pay interest on the money you deposit. They offer a safe and secure way to grow your money, either to pay for a future purchase or just so you have money set aside for a rainy day.
But savings accounts come in several forms, including high-interest savings accounts, online savings accounts, and registered accounts like TFSAs. And with so many options to choose from, how do you decide which one is right for you?
In this guide, we’ll explore how savings accounts work, what interest rates they offer, and how to choose an account that matches your needs.
A savings account is a bank account designed to help you save money, but which usually allows you to quickly access your funds if you need money in an emergency. Here’s how it works.
When you put money in a savings account, it doesn’t just sit there. Instead, you earn interest on every dollar you have in the account, which means your bank balance grows without you having to do anything.
Savings accounts are available from every bank and credit union, and there are several reasons why opening a savings account is a good idea:
There are two main types of bank accounts in Canada: savings accounts and chequing accounts. While savings accounts are designed to help you build a bigger bank balance and minimize your spending, chequing accounts are designed to handle everyday transactions.
Chequing accounts provide easy access to your money so you can pay bills, transfer funds to other people, and make purchases and ATM withdrawals with a linked debit card.
There are several different types of savings accounts to choose from in Canada, including:
You can find regular savings accounts at just about every bank or credit union in Canada. They allow you to earn interest on the funds you deposit and typically don’t charge monthly fees, while you can withdraw funds if you need cash in an emergency.
However, there may be limits on how often you can access your money in order to discourage you from regularly withdrawing — you could be hit with a transaction fee for each excess withdrawal.
As the name suggests, high-interest savings accounts offer a higher interest rate than regular savings accounts. They’re available from traditional banks and credit unions as well as online banks, and they don’t usually have monthly fees.
However, you may need to meet certain terms and conditions to access the high rate. For example, you might need to deposit a minimum amount into your account each month, or the high rate may only apply for a limited introductory period such as six months.
Online savings accounts are offered by online-only banks. This means that you can’t pop into a branch if there’s a problem with your account that you need to sort out, but these accounts also have their perks.
Because online banks don’t operate any brick-and-mortar branches, they have lower operating costs than traditional banks. This means they can offer competitive deals to their customers, including high-interest rates on savings accounts and no or low fees.
If you want to pool your money with your partner to save for a shared savings goal, for example, a house deposit, a joint savings account lets you do exactly that. Some accounts can also be held by more than two people, allowing you to set up a family or group savings plan.
The potential downside is that you’re giving someone else access to your money, so you should only ever open a joint bank account with someone you trust.
Registered accounts are investment accounts that are given special tax status by the Canadian government. They allow you to earn tax-free income in some cases, and defer your tax obligations to the future in some other cases.
Types of registered accounts in Canada include:
Guaranteed investment certificates (GICs) and term deposits both allow you to earn a guaranteed rate of interest on the money you invest. Both are considered a secure and low-risk way to grow your money, and you’ll usually get a higher interest rate than you would with a normal savings account. The difference between term deposits and GICs is the term: while term deposits are usually short-term investments lasting nine months or less, GICs typically have terms ranging from 1 to 10 years.
However, many of these fixed-rate investments require you to lock away your money for a set period of time, and accessing it early may incur fees.
Children’s savings accounts are a great way to help your kids learn the value of money and save for the future at the same time. Available from some banks, credit unions and online banks, kids’ savings accounts pay interest on the money deposited in the account.
The best accounts have no monthly fees and no minimum balance requirements, but there are often limits on the number of transactions you can make. Some accounts also have apps and online tools that parents can use to track their kids’ spending.
Age limits apply, so check the fine print before your child signs up.
The best savings account for you depends on your savings goals, financial situation and banking needs. Consider the following factors when comparing savings accounts:
Savings account interest rates are the most important factor in growing your money. The interest rate is usually expressed as a yearly rate called the annual percentage yield (APY). Some savings accounts pay as little as 0.10%, but there are plenty of other accounts, including savings accounts through digital banks that pay an APY of 2.00% or more. This can make a big difference. For instance, if you held $5,000 in a savings account that paid 0.10% APY, then that account would earn $5 in interest in the first year. Pick a savings account that offers 2.00% APY and you would earn $100 in interest earnings, in the first year.
While earning more is always a better deal, there’s another reason why higher interest rates are important: Inflation. If the interest rate on your savings account is less than the rate of inflation, your purchasing power decreases, even if your savings account balance increases. That’s because inflation erodes how much we can buy with each dollar we earn. To combat inflation, savers and investors look for interest rates that are above the inflation rate. As of May 2023, Canada’s inflation rate was 3.36%.
The interest rate on your savings account — as well as personal loans, car loans, credit cards and mortgages — is determined by your bank. However, banks and lenders will use the Bank of Canada’s overnight rate as their benchmark. When the Bank of Canada (BoC) increases the overnight rate, interest rates at banks typically rise, as well.
In Canada, financial institutions usually advertise a compound interest rate that is the annual rate, but some institutions will pay out interest semi-annually, monthly, weekly or even daily. The faster your account accrues interest — earns interest income — the faster your savings will grow. This is because of compound interest. Compound interest means your initial deposit earns interest and, if the money is left untouched, then the new balance — that includes the initial deposit, plus the interest earned — also accrues interest. The more often your interest is compounded the more your account balance grows.
To determine which type of savings account is right for you, it’s best to consider the pros and cons of each saving account option. To help, we’ve broken out the pros and cons for each of type of savings account in Canada.
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Not sure which type of savings account is right for you? Think about your financial situation and why you want to open an account. For example:
The best high-interest savings accounts combine plenty of interest-earning power with no monthly fees and no minimum balance requirements. The Neo Money Account ticks all of those boxes and more, offering a 4% interest rate on your balance and no fees. There’s no minimum balance required to open an account, and no transaction fees. For more information about this and other accounts, check out our guide to the best high interest savings accounts.
If you want to open a savings account with up to three other people? There’s a lot to like about the EQ Bank Joint Savings Plus Account. With no monthly fee, free unlimited transactions and a very competitive interest rate of 2.50% - 4.00%, this account makes it easy to meet your joint savings goals. Check out our joint bank accounts guide for more details.
If you want to invest in a 5-year GIC, a Tangerine GIC is our top pick. With a competitive rate of 3.25%, plus handy features like easy online account management, it’s well worth a look if you want a guaranteed return on your investment. Check out our guide to GICs for more information.
Most savings accounts in Canada pay compound interest. This is when the interest you earn on your balance is deposited back into your account, usually monthly, so you can then earn interest on your interest as well as on your initial deposit.
Compound interest is a powerful savings tool and can help you reach your savings goals faster. Rather than growing at the same steady rate, the increase in your balance accelerates over time.
For example, if you invest $5,000 in a savings account with 3% interest compounded monthly:
Use our compound interest calculator below to work out how much you could save.
Fees can quickly chip away at your hard-earned savings balance, so it’s important to do everything you can to avoid or minimize fees. Steps you can take include:
Creating a savings plan can help you reach your savings goals. The aim here is to identify what you’re saving for, how much you need to save in what timeframe and work out what steps you’ll take to grow your money. Here’s how to create a savings plan.
The interest you earn on your savings account is taxed at the same rate as earned income. For more on how to report this income to the Canada Revenue Agency, read the Finder guide on savings accounts and taxes.
Savings accounts offer a simple but effective way to afford major purchases or just put money aside for a rainy day. But with so many different types of savings accounts available, it’s vital to understand the pros and cons of each type and whether they suit you.
Ultimately compare a wide range of savings accounts and shop around for the best savings account interest rates to help you reach your financial goals.
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