High-Interest Savings Account Overview: Everything You Need To Know
Thinking about investing but worried about the volatility of the current global investment market? If so, you may want to look into a high-interest savings account. These banking products are designed to help savers maximize their savings and as the name implies, pay a better interest rate than traditional savings account products. Referred to as a HISA for short, many major banks, credit unions, and similar financial institutions offer their members access to high-interest savings accounts. The main purpose of a HISA is to allow individuals to earn a modest return on their savings without losing immediate access to their funds in the meantime.
HISAs are a great way to save money for a short-term goal such as a down payment, wedding, or vacation. They can also be a smart way to store money during economic uncertainty or a downturn when the stock market seems too risky. Low-risk investors often complement their financial portfolio with a HISA for the added security.
What's the Difference Between High-Interest Savings Accounts and Regular Savings Accounts?
Both HISA savings accounts and savings accounts are designed to help customers save money. The main difference is that high-interest savings accounts usually pay a better interest rate which allows savings to actually grow. The interest rate on standard savings accounts usually results in very minimal growth whereas HISA accounts do produce measurable results over time. Since HISAs are not meant to be used regularly, they are usually subject to transfer limits, withdrawal limits, minimum balance requirements, and/or transaction fees.
In general, a regular savings account is sufficient for storing surplus cash that isn't needed on a regular basis while a HISA is a better place to save money intended for use farther down the road such as tuition, home renovations, or a vacation. While you may dip into a regular savings account here and there, the goal of a HISA savings account is only to access it once you have reached your anticipated total.
How do High-Interest Savings Accounts Work?
As noted above, the largest appeal of high-interest savings accounts is that they allow your money to grow at a steady and secure rate. Large financial institutions that are members of the CIDC can insure HISAs up to $100,000 whereas credit unions that are insured locally by province usually cover the entire deposit amount without limits. While they may seem complex, the principle behind high-interest savings accounts is actually quite simple. Money that is placed into a HISA account generates a higher amount of interest because the bank is allowed to use these funds to loan out money to others.
In other words, when you place money in a HISA, your bank or credit union will use it to back their own loans which generate interest-driven profits that the bank, in turn, shares with you. In general, HISA accounts offer rates that start around .5% and extend up to 2% depending on the financial institution you choose. Usually, there are no monthly service fees but there may be limits on the number of transfers or withdrawals you are allowed since the account is not meant to be regularly accessed. Some banks also charge transaction fees to offset costs.
Are High-Interest Savings Accounts Taxable?
Any earnings that you make off a high-interest savings account are considered taxable. You must declare your earnings from interest and then pay the proper tax rate. However, savvy savers who hold a HISA placed within a Registered Retirement Savings Plan or a Tax-Free Savings account can protect their savings from taxes.
Who Should Open a High-Interest Savings Account?
To reiterate, someone with the goal of saving money for a long-term purchase or financial goal would benefit from a high-interest savings account. Someone who likely needs to access their money in their savings account on a regular basis would not since there are usually fees associated with transactions that will offset the benefits of a higher interest rate.
How to Choose the Best High-Interest Savings Account
Most major banks and credit unions in Canada offer their customers access to high-interest savings accounts so you should have a wide array of options. Since the goal of a high-interest savings account is to maximize your earning potential you need to start by looking at interest rates. You need to look for an interest rate that is higher than the rate of inflation so that you end up with measurable results. Over the last decade the inflation rate has leveled off around 2% so ideally a HISA with a 2% interest rate or higher is the best choice.
However, you should never shop for a HISA based on interest rate alone. You also need to look at the terms and conditions that are applicable to any potential account. Some financial institutions may require a minimum balance, limit withdrawals, charge fees on any transactions and/or have a certain period in which your initial deposit is locked-in.
While shopping around for a HISA also keep an eye out for high promotional rates and cash signing bonuses to help optimize the amount you are able to earn upfront. Keep in mind that the long-term interest rate will pay off better than a short-term rate and place most of your emphasis on it. For instance, earning 2% for the entire lifespan of an HISA will pay more than an initial offer of 3% for the first year and then 1.5% thereafter.