What is a High Interest Savings Account?
A high interest savings account can take many different forms, but there's one characteristic that they all share: the highest interest at the lowest risk. They aren't a replacement for your regular everyday bank account (well, most of them aren't), but they're supposed to supplement them, offering a safe, accessible place to keep your money. The most important differences are the different ways to access them and the fees involved (I know, fees are terrible, but you'll have ways of avoiding them).
Why use a High Interest Savings Account?
There are many reasons:
- High Interest: The obvious reason. These accounts earn more interest than your typical bank account - a lot more. Keep in mind that interest rates come in and out with the tides; right now, it seems that we are at low tide.
- Accessibility: Whereas with GICs, your money is locked away for a set time (from 90 days to 5 years), with High Interest Savings Accounts, you can access your money whenever you want. Also, short-term GICs (under 3 years) tend to have lower interest than the highest interest accounts in this comparison.
- Investing Small Sums: Buying stock or Mutual Funds are only profitable when you're investing a lot of money for a long time. This is mainly because of MUCH higher fees such as $29 to buy the stock and $29 to sell it, depending on your broker. If you buy $500 of stock and pay $29 in fees twice, you'll need to make 13% on that before you actually make any money on that. With a high interest savings account, the fees are considerably less, and in most cases non-existent.
- Safety: All of these banks are insured (up to $100,000 per account, thanks to Keith Sandercock for pointing that out; Achieva, MAXA and Outlook are insured 100%, thanks to Michael Chow for pointing that out), meaning that this money is perfectly safe. The interest rate may go down but you'll never lose any money.
When is it a bad idea to use High Interest Savings Accounts?
- Lots of Money: If you have lots of money ($2,000 or more), it might be a good idea to try your hand at stock trading or mutual funds. The high fees don't matter as much with higher sums, and you never know how much you're going to make, but beware, you can pretty much lose everything too. A safer option is a market index GIC. This GIC is tied to the markets so that you can get rates of return similar to the market (some are even 125% of the market's return) but your money is always guaranteed. So if the market takes a nosedive, you get all your money back, and nothing more.
- Very High Interest Rates: With GICs and Term Deposits, your money is locked away so that you can't access it for a certain amount of time. This also means that the interest rate is set for the rest of the term. If you can get a GIC or Term Deposit when the interest rate is high, that interest rate will remain high, regardless of the market.
A word about Tax Free Savings Accounts
Starting on January 1, 2009, the gods of taxation have bestowed upon us a new way of cutting down on taxes. In the spirit of not reinventing the wheel, I will link to a wonderfully useful article about the new accounts and what they're good for. Because this is a developing story, offerings are new and the field may change quickly, but for now, this thread offers a great list of the accounts and their interest rates.
What do I need to open an account?
Usually no more than a personalized cheque and a valid Canadian Social Insurance Number. You may also need to photocopy different forms of ID. Some banks (ie. Citizens Bank) really dig deep and get into things like your credit history, but that's usually because they offer extras like overdraft protection. If you're about to order cheques on your existing chequing account (up to $28) just so you can get one of these accounts, know that you don't have to. The banks in this review that have real branches allow you to sign up without a cheque, as long as you go in and speak to a real person. On a side note, if you're interested in moving your chequing account to another bank (perhaps one that offers free cheques), I've written another article about the best chequing account deals.