Five Benefits of High-Interest Savings Accounts

Five Benefits of High-Interest Savings Accounts

Five Benefits of High-Interest Savings Accounts
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Statistics Canada reports that in 2018, Canadian households had an average net savings of about $1,100. By 2020, this amount had increased to 1.7 percent. But the savings rate of the average Canadian is nominal when compared to the annual take-home pay of most Canadian families and individuals. So what vehicles are available to encourage Canadians to save?

True to its namesake, high-interest savings accounts (HISAs) are designed mainly as a way to encourage Canadians to prepare for their future. A high interest savings account is simply a savings account that has a higher-than-average interest rate when compared to other accounts. In addition, these accounts can be insured by the Canada Deposit Insurance Corporation.

The minimum account balance for a high-interest savings account is higher and the number of withdrawals allowed is restricted. The restrictions serve to minimize operating costs of the financial institution. This allows banks to have more money to give in form of loans.

It is the interest earned on loans given by financial institutions that enables them to pay interest to holders of special savings accounts such as the high-interest savings account. 

What are the benefits of a high-interest savings account?

There are many reasons as to why you might consider a high-interest savings account as a vehicle for financial security. Below are five benefits of a high interest savings account:

1. It offers maximum flexibility

A high-interest savings account provides maximum flexibility for your funds. The rate of return on this type of account may not be as high as it is with other savings accounts, but at no time will your money be locked in so that it is inaccessible or accessibility requires breaking a contract.

A good illustration of this is when savings are made with a GIC.  A GIC only allows you to access the savings after a pre-determined period of time, ranging from months to years. Breaking the contract fetches penalties that may eat into your savings. Furthermore, it is not guaranteed that unlocking the account will allow you to access or redeem the amount of money that you need. As opposed to this, a high-interest savings account allows you to access your funds at any time making it convenient when you are confronted with an emergency.

2. It provides security for your funds

A high-interest savings account provides sufficient security for your funds. There are occasions when a financial institution holding your funds may face challenges that results in its closure. If you are a holder of a high-interest savings account offered by a financial institution that belongs to the Canada Deposit Insurance Corporation, you may be eligible for insurance coverage by CDIC. Should the financial institution with which you hold a high-interest savings account collapse, you are likely to receive payment from the CDIC. As such, you will never lose your investment or funds since a high-interest savings account provides you with additional security.

3. It helps you create an emergency fund

Life is unpredictable. Often times, it throws surprises at all of us. Such surprises could be in the form of losing a job, a sudden illness or any other family emergency that may put you under immense financial pressure.

A high-interest savings account is a good bet for creating an emergency fund for such unforeseen contingencies. This is because while saving to the emergency fund, the fund fetches a better return as it grows as compared to an ordinary savings account. If you want to have a safety net for emergencies, a high-interest savings account is best suited for you.

4. It offers protection from taxation on income using the Tax-Free Savings Account (TFSA)

Under ordinary circumstances, every investment that generates income attracts tax payment from the government. However, savings put in the Tax-Free Savings Account (TFSA) are not taxed, and a high interest savings account is among the investments allowed in a TFSA. This makes it possible for you to increase the amount of savings in your account without paying taxes on the investment income earned.

You only need to make sure that if you are moving your high-interest savings account into a TFSA, there is sufficient space in the TFSA to accommodate the transfer. This is because TFSAs have controlled annual contribution limits and exceeding the established limit can attract taxation. If you want to earn tax-free returns from your savings, a high-interest account matches your needs.

5. It helps you achieve your savings goal

Financial advisers recommend that you give yourself a treat. The high-interest savings account provides a good opportunity for you to pay yourself first by saving for a particular goal. By committing yourself to add to your savings as regularly as you pay bills for your monthly utilities, your savings will steadily grow. In due course, you will be able to achieve your savings goal.

Even so, it is important to note that waiting to save after everything else has been catered for is not the best way to add to savings in a high-interest savings account as it gives room for procrastination. The best approach is to set up a regular auto-deposit plan that will ensure that your savings grow steadily. If you want to achieve your savings goal without difficulties, a high-interest savings account is your single best option.

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