After enduring more than a decade of rock bottom interest rates, high interest savings accounts are finally beginning to show some signs of life. As major trade linkages experience lingering supply chain disruption and volatility looms in key equity markets, domestic and international investors alike are on the lookout for low risk vehicles to safely store their money. With the global economy caught in a state of unprecedented flux, the humble high interest savings account has become an attractive option for risk-averse investors stuck on the sidelines.
While the Bank of Canada isn’t expected to hike interest rates until at least 2023, a small group of retail banks have started signalling renewed support for high interest savings account holders. If you’re thinking of parking your money in a high interest savings account, you’ll be happy to know that Canadian banks offer close to 2% in fixed interest, a relatively generous offering when you factor in the increasingly bleak global economic outlook.
Why Park Cash in a Savings Account in Today’s Economic Environment?
Before we dive into the contemporaneous advantages of high interest savings accounts, it’s important to note that parking the bulk of your money in a retail savings account is no substitute for a long-term investment strategy. Nevertheless, when traditional investment instruments are subject to heightened volatility or protracted downturn, high interest savings accounts offer investors a fast and reliable way to shelter their capital. If you’re still skeptical about opening your own high interest savings account, consider the following three benefits:
- Deposit Security
In addition to packing an extensive suite of digital security features, Canada’s retail banks also boast comprehensive government-backed insurance support. Broadly speaking, large online banks are typically backed by the government-run Canadian Deposit Insurance Corporation (CDIC), an institution designed to protect retail deposits in the event of capital flight or bank insolvency. Thanks to the CDIC, high interest savings accounts are insured to a sum of $100,000 per account holder. Please note, if you plan on banking with a Manitoba-based credit union, your account will be insured by the Deposit Guarantee Corporation of Manitoba (DGCM) instead of the CDIC.
- Account Accessibility
Barring routine website and/or app maintenance, high interest savings accounts are almost always accessible for online balance checks, deposits, and withdrawals. This is especially useful if you’re following up on potential investment options and holding your money in a savings account in the interim. Unlike brokerage firms, retail banks do not operate under a three-day settlement rule. This not only streamlines the process of depositing and withdrawing money from a high interest savings account, it also makes it easier for you to monitor the accumulation of interest on your account balance.
- Purchasing Power Preservation
Deposited money begins to lose purchasing power when inflation exceeds the interest rate on your deposit. With economic uncertainty skyrocketing, the estimated rate of inflation in Canada has dropped to 0.61% in 2020. To prevent inflation from devaluing your savings, you can either open a high interest savings account or invest your cash in a growth portfolio of equities, high-yield bonds, and precious metals. According to IMF projections for 2021, inflation in Canada is expected to creep up to 1.26%. Operating under the assumption that inflation continues to rise, we recommend looking for high interest savings accounts that offer between 1.5% and 2% in fixed interest.
Breaking Down Canada’s High Interest Savings Account Options
In the years following the 2008 financial crisis, the near-zero interest rate environment made it commercially unviable for retail banks to offer competitive interest rates on their high interest savings account products. Even now, in 2020, savings account interest rates in developed economies still struggle to push beyond the 0.75% to 1% range. Fortunately, a small group of Canadian banks have managed to buck this trend. To help narrow down your options, we’ve listed five of the most reputable high interest savings account products currently on offer in Canada:
- Equitable Bank Savings Plus: 2.00%
- MAXA Financial High Interest Savings Account: 1.80%
- Outlook Financial Savings Account: 1.75%
- Alterna Bank High Interest Savings Account: 1.50%
- Oaken Financial Oaken Savings Account: 1.50%
Keep in mind, the interest rates listed above are everyday rates. When shopping around, it’s entirely possible that you’ll encounter savings account products with significantly higher teaser rates. If you’re willing to open and close multiple savings accounts, you might even be able to benefit from these teaser rates by frequently jumping between banks. However, it’s important to remember that the banking account business model relies on customers being too lazy to switch accounts when their teaser rate expires. If you’re the type of person who dreads the thought of switching banks, it’s probably best to choose your high interest savings account based on the everyday interest rate rather than the teaser interest rate.