When To Use A High Interest Savings Account

Saving money for the future has never been more important than it is now. With the world’s economy attempting to rebound from the effects of Covid-19, having cash saved is part of any solid financial plan. You may be wondering what are the best circumstances to store your money in a high-interest savings account?

Investing your savings is a wise option for your long-term goals – such as retirement planning. However, if you need quick access to cash you probably don’t want to have to liquidate part of your investment portfolio.

So how about using a traditional savings account? That’s not an ideal option either since the interest rate on one of those could be as low as a measly 0.01% a year.

Here is where a high-interest savings account shines. An HISA can pay substantially more than your regular savings account – so you can actually see your money grow.

Here’s everything you need to know about a high-yield savings account and when to use one.

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What Are High Interest Savings Accounts?

High interest savings accounts offer you a much higher interest rate than you get with your regular savings account.

Here is why some financial institutions are able to offer these rates:

• Some of the banks are online institutions, which cuts down on costs.
• Because making frequent transactions with an HISA can be pricey, most customers don’t use these accounts for daily activity. Less transactions to process keeps costs low for the banks.
• Banks attract new customers by offering high interest rate accounts.

What Qualifies As “High-Interest”?

There isn’t a set interest rate that defines an account as high-interest. That being said, you should look for an account that offers a rate around 10x to 30x higher than a traditional savings account with one of the big banks.

Consider inflation – that’s the 2% rate at which consumer prices rise each year. You want to get at least that percentage return on your savings to keep up with inflation – therefore, actually making money.

A good high interest savings account can help you achieve this important money-making goal.

Notwithstanding the different interest rates, high-interest savings accounts and regular savings accounts have many similarities.

What Types of Transactions can you Perform with High Interest Savings Accounts?

With a high interest savings account, you’ll have access to much of the same features as your regular account:

• Deposits – either cash or cheques
• Withdrawals – at ATMs, bank tellers, in-store
• Payments for goods and services
• One-time bill payments
• Pre-authorized bill payments
• Transfer of funds to another user of same lending institution
• E-mail money transfers

High-Interest Savings Account VS Regular Savings Account

So how much higher is the interest rate on a high-interest savings account?

Let’s use a hypothetical example to illustrate how much money an HISA can earn you.

Mary has saved up $10,000 in an emergency fund. She wants to have quick access to this money, so she chooses to deposit it in a savings account. If she were to put $10,000 into a traditional savings account with a 0.01% interest rate, Mary would only earn $1 during an entire year.

Compare that to a HISA, with a rate of 2.00%, and Mary earns just over $200 in interest in the same amount of time!

And that’s without her making any additional monthly deposits.

You can see why many Canadians) (like our hypothetical friend, Mary) are choosing high-interest accounts as a savings vehicle.

High Interest Savings Account vs Traditional Savings Account Comparison Chart

Here’s how much you’d earn in interest over the years if you had $10,000 in an HISA (at 2.0% annual interest, compounded monthly) -compared to a savings account that pays 0.01% interest.

	High-Interest Savings Account Balance (2.0% interest)	Regular Savings Account Balance (0.01% interest)	Difference in Interest Earned
Starting amount	$10,000.00	$10,000.00	–
After 1 year	$10,201.84	$10,001.00	$200.84
After 5 years	$11,050.79	$10,005.00	$1,045.79
After 10 years	$12,211.99	$10,010.00	$2,201.99
After 20 years	$14,913.28	$10,020.02	$4,893.26
After 30 years	$18,212.09	$10,030.04	$8,182.05

Fees

Like your regular savings account, there is normally no monthly fee associated with keeping a high interest savings account. However, there can be fees associated with some of the transactions you perform – so you won’t want to use it as your go-to cash source for daily purchases.

Here is a summary of extra fees associated with some HISA’s:

Fee Type	Purpose	Cost To You
Transaction Fee	If there is a limit to the number of transactions included in your HISA plan, you may be charged a small fee if you go over.	Typically $5 per additional transaction
Email Money Transfer Fee	To send (not receive) an email money transfer, you may be charged a small fee.	$1-2 per transaction
Non-Bank ATM Withdrawal	When you withdraw money from an ATM attached to another bank (not your own).	Around $1.50-2.50 per transaction, $3-$5 at foreign ATMs
Monthly Statement Fee	Some banks charge a small fee to mail you a copy of your monthly statement.	$2-5 per month

Do You Have To Pay Taxes On A High Interest Savings Account?

The interest you make on any money you have in a high-interest savings account will be taxed by the Canada Revenue Agency.

So, even though you probably won’t be earning a huge amount of taxable income in your HISA, be aware that you will be taxed at whatever your marginal tax rate is. The one exception to this are savings held in a tax-free savings account.

Your financial institution will send you a summary of your earnings at tax time so you can file your income tax return.

Why Online Banks Offer High Interest Savings Accounts

You have probably seen the adds for online banks that offer highly competitive high-interest savings accounts – like EQ Bank’s Savings Plus Account.

So, how can these online banks offer such high rates as part of their business plan?

The reason is because their cost of operations is much lower. Since they don’t have physical bank branches to run they can pass that savings onto their customers.

You will still get excellent customer service – be it over the phone, or through online chats, with a customer service rep.

Most Canadians are onboard with online banking –  nine-in-ten of us use online banking already. So, giving up the option of walking into a branch won’t be a big change if switching to an online-only financial institution.

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Should I Use A High-Interest Savings Account?

Whether you’re planning for your wedding or saving for a down-payment on a house, HISA’s are a versatile way to reach your savings goals.

Consider opening a high-interest account if one of the following situations applies to you:

• Building an emergency fund.
• Saving up for a big purchase, like a house or a car..
• Creating a university or college fund for your kids.
• Protecting your money against inflation.
• Helping your general savings grow.

Do a bit of research before choosing a high-yield savings account. Remember, you aren’t obligated to pick the account offered by your current bank. Chances are you can find a better rate somewhere else.

Here are some key items you should be comparing when shopping around for a HISA:

High Interest Savings Account Comparison Guidelines

Interest Rate	Make sure to clarify whether the interest rate being offered is the standard rate or an introductory rate. Some financial institutions offer a promotional rate (over 2.00%) for 3-6 months, but then drop down to a lower rate. Starting off higher isn’t always your best bet if the rate takes a nose-dive after a few months. You should also check if there are minimum and maximum thresholds you must meet to maintain the offered rate.
Fees	Some banks may charge you an introductory fee for opening a high-interest account, followed-up by a monthly fee for keeping it open. You can find options, such as EQ Bank’s Saving Plus Account, that don’t charge you any monthly fees.
Easy Access To Your Money	Look into how easy it will be to access the money in your high-yield account. Some banks allow you to make instant withdrawals at a bank machine, while others may require a waiting period before your transaction is processed.
Compounding Offer	Find out how frequently the interest you earn from your account will be compounded. Interest that is compounded daily will grow your savings faster than that which is compounded yearly. You want the interest you earn to be added to your balance frequently.

Related Article: How To Save Money On A Low Income

What Are The Best High Interest Savings Accounts In Canada?

In Canada, we have a good variety of HISA options offered by both online-institutions and traditional banks.

EQ Bank’s Savings Plus Account is a great example of a high-interest savings account. It currently offers a 1.50% everyday interest rate* – well over the 0.01% to 0.05% offered on regular savings accounts today.

EQ Bank is the online-only institution of Equitable Bank, and is insured by the Canada Deposit Insurance Corporation.

There is no monthly fee, free transactions, free electronic money transfers, no minimum balance, free mobile cheque deposits, free online bill payments, and  free Interac e-Transfers® per month. The interest rate is calculated daily on your closing balance and paid monthly. The maximum balance you can hold in your account is $200,000.

EQ Bank also recently introduced TFSA and RSP accounts with high interest rates.

Conclusion

If you have money that you just want to sit in a bank account and earn you a high interest rate for a stretch of time, a high interest savings account is the perfect choice.

You won’t pay fees if you don’t use it for frequent debit transactions, and the higher rate of interest will help you keep pace with inflation and actually grow your savings.

*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.