Earn interest on your money while you save. If you have extra money not needed for daily use, you might want to consider opening a savings account. However, if you are planning to save for education or retirement, a registered account is best. With a registered account there are no restrictions and often many great benefits such as tax deferrals. Savings accounts do not have limitations on how much you need to contribute or how much you can withdraw.
Registered Accounts – What are They?
A registered account is often used when saving for a specific goal, such as education, retirement or disability. For example, if you are saving for your child’s educational future, you might consider a Registered Education Savings Plan. A Registered Retired Savings Plan can be used for retirement savings. Each account has different rules and regulations when it comes to your contribution, withdrawal or taxation.
What’s Included in a Registered Account?
Registered accounts, such as the Registered Retired Savings Plan (RRSP) include investments such as stocks and bonds. With stocks, you will find a greater potential for appreciation. However, bonds often generate more interest.
Savings Deposit Options in Registered Accounts
With a savings deposit you will have complete protection of your investment, plus generated interest. If the bank fails, your savings deposits are insured by the CDIC (Canadian Deposit Insurance Corporation). They will insure up to $100,000.
- Guaranteed Investment Certificates (GICs) – A good option for a higher rate of return. This option will guarantee a return of the principal or the initial invested amount, plus the interest a specified rate.
- High-Interest Savings – This account offers a higher interest rate compared to a savings account.
- Savings Account – Offers the lowest interest rate, but allows you easy access to your money.
Not Always Called a Savings Deposit…
When it comes to your savings deposit, not all banks call it that. However, you will find that these accounts still have the same characteristics such as protecting your principal interest. Even though your bank might not use the name “savings deposit,” you will find it is still the same.
Interest on Your Savings Account
Interest in a savings account is added to your principal regularly throughout the year. When you withdraw money from your account, you will receive all interest accumulated up until that point. With registered savings accounts your interest will be redeemed without being penalized.
Disadvantages to a Savings Account
Like all accounts, there are several drawbacks to a savings account. For starters, they offer a low interest rate. That is why it is important not to keep all of your money in a savings account, but rather diversify your money in other long-term investing accounts.
Alternatives to a Savings Account
As previously mentioned, do not leave all of your money in a savings account. It will not be beneficial in the long-term. With Guaranteed Investment Certificates you can receive a higher interest rate with protection from the CDIC. If you know that you won’t need to withdraw your money for a period of time, it will be financially beneficial to put it in a short-term GIC. However, if you need to access the money quickly, a savings account is often a better option.
Investing in Other Accounts
Even though savings accounts are a great option for putting your money away, there are many other ways to invest your savings. So, what are the alternatives for investing your savings and which is best for you?
Unlike savings account, a chequing account doesn’t often earn interest, and if it does, it is a small amount. However, if you need to access your money at any time, then this is a great option for you. Plus, your money is also insured by the CDIC and a greater number of transactions are allowed without incurring any fees.
High-interest Savings Accounts
As in the name, this account offers you higher interest than a typical savings account. However, a minimum balance is required, but you will have to check with your bank for those regulations. This account is not used if for daily banking. It is beneficial for a long-term investment.
Guaranteed Investment Certificates (GIC)
If you are planning to invest your money for months or years, a GIC is the way to go. With this account you cannot access your money on a daily basis, but the interest paid is much higher than that of a savings account. With your money locked in, there could be a penalty for taking your money out early. With GICs, your money is insured by the CDIC for up to $100,000.
Bonds are another investment option. There are two types of bonds – Government savings bonds and standard bonds.
Government Savings Bonds
These bonds are issued by the government and pay a fixed interest rate, which are often low. These bonds do not trade on a daily basis and are only sold during specific times of the year. Government savings bonds are protected, but you could find that inflation affects the overall value.
These bonds are traded in the market and include the debts of the government and debts issued by corporations. These bonds have a set interest rate, but this may not always be the percentage return you receive. For example, a corporation issues a bond at 3.00% interest. Once you purchase that bond, the interest rates decline and investors start bidding up the price of corporation’s stock on the open market. Therefore, they return what similar bonds in the market are yielding.
With standard bonds there is a risk of a company failing, so your money is at risk. These bonds are not covered by the CDIC.
The Stock Market and Mutual Funds
If the low interest rates from savings accounts and bonds are not for you, then you might consider the stock market. This is a great, but risky way to build your savings account.
If you have time to manage your investments, you might consider purchasing stocks on your own. However, it is important to have a diversified portfolio. This is why many people opt to buy stocks through a mutual fund or exchange traded fund (ETF). Mutual funds can help you get the best portfolio for your savings.
With stocks, there are several benefits including receiving dividends in addition to your capital gains. However there are downsides. With stocks there is a great risk, and you could experience a large capital loss, and your money in the stock market is not insured by the CDIC.