Do you need a savings account you can’t touch?
Savings you can't withdraw from can help you grow your balance.
Guaranteed Investment Cetificates (GICs)
Unfortunately, most Canadian savings accounts still allow withdrawals and transfers and even carry small to no fees for making these transactions. This doesn’t really help discourage you from touching your savings.
There is a savings vehicle that can help lock your money away, preventing you from spending it. A guaranteed investment certificate (GIC) locks your money away usually from 1 month to 5 years, while it earns a fixed or variable interest rate. It’s more restricting than a traditional savings account because you can’t access your money until the term is finished (unless you have a cashable GIC with no withdrawal restrictions). If you need to make a withdrawal, you’ll need to give 31 days’ notice and pay a penalty.
There are a couple of key benefits to GICs. First, you can get the security of a fixed interest rate and a guaranteed return on your investment. If interest rates drop while your money is locked away, your savings won’t be affected.
Second, these accounts are set up to discourage you from dipping into your savings balance. You typically can’t access the funds immediately, so any money you deposit is safe from the risk of impulse buying and unnecessary spending.
On the other side of the coin, GICs are not all that convenient if you ever need access to your funds in an emergency, and you also won’t benefit from any interest rate increases until your deposit matures.
What to look for in a GIC
Consider the following features when comparing the pros and cons of a GIC:
- The interest rate. Interest rates can vary greatly between banks and the term you choose. Look around for the best interest rates — but make sure there are no unexpected fees attached.
- How often interest is calculated. Check to see whether interest is calculated on the account daily, monthly, quarterly or yearly. The more often interest is calculated, the more your balance grows.
- Term length. When comparing accounts, evaluate the features of accounts with the same term length. For example, only compare 3-year GICs with other 3-year GICs. If your bank doesn’t offer the term you want, look elsewhere.
- Fees for early withdrawal. If you have a cashable GIC, it’s worth checking what fee you’ll incur if you need to withdraw your money before the term ends.
- Where the interest is paid. Is the interest you earn paid back into the same or different account? Do you need to open a linked account with the same financial institution to receive interest payments?
- Loyalty bonuses. If you want to reinvest your money into another GIC after your first deposit matures, will you be rewarded for your loyalty with a bonus interest rate?
Hard-to-access savings accounts
Savings accounts offer the benefit of compound interest, and they charge minimal or no fees while giving you quick and easy access to your money. Savings accounts also allow you to continually add money to start building your nest egg. Scheduling an automatic transfer into your account each month can quickly build a sizable savings balance.
Some savings accounts offer features to keep you from falling prey to impulse buys. If you have trouble keeping your hands off your savings, consider getting an account without a debit card so that you can’t make withdrawals outside of business hours. Getting an account that doesn’t allow transfers is also a good idea.
As the name suggests, savings accounts are designed to help you save money, not spend it. If you want regular access to your money, use a chequing account.
What to look for in a savings account
Not all savings accounts are created equal. There are a few things to watch out for when signing up for a new account:
- How often interest is compounded. The more often interest is compounded, the more money you’ll earn.
- Minimum balance amount. Banks often have a minimum amount required to open an account. Some banks even have a minimum balance requirement for the life of the account, and you can quickly accrue fees if your balance dips too low.
- Linked account requirements. Some banks will require you to also open a linked chequing account with them to open a savings account. If this is the case, make sure the chequing account is suited to your needs and doesn’t have any hidden fees.
- Hidden account fees. Exorbitant bank fees can quickly defeat the purpose of any interest earned on an account, so read the fine print to make sure you’re aware of any ongoing fees, withdrawal fees or other transaction charges.
- Accessibility. Check to see whether your account can only be managed online or whether you also have branch, mobile banking and phone banking access.
If you’re saving up for your retirement, a retirement savings account might be your best option. Any money that you put into a registered retirement savings account typically cannot be withdrawn without a penalty until you reach retirement age, and contributions are tax deductible.
Compare RSP accounts
GICs and savings accounts can both help you save money. If you think you might need access to your money in the near future, or you want to add money each month, a savings account may be your best option. But if you can commit to keeping your hands off your savings for a specified period of time, a GIC can help you add interest and save up. A lot of savers use both options — when your savings account starts to get comfortably high, you can pull money out and put it into a GIC. If you choose one with a high interest rate, you can sit back and watch your savings grow.
Curious which is better? Compare GICs to tax-free savings accounts here.
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