How To Save Successfully

Part of your monthly budget should always go to savings. Setting aside 10% of your income each month is a good target, but simply not spending that money is only half the battle. Letting your saved dollars sit in your chequing account accumulating no interest is smarter than spending them all on Timbits and safer than stuffing your mattress with cash, but it still isn’t the best investment decision to make. Unless you want to see your savings severely devalued by inflation, you need to put them somewhere where they will earn some interest. This guide will help you to explore a few of the easier and safer options out there.

Savings Accounts

Savings accounts are the safe, reliable way to save money and have it earn some interest. Unlike many other investments, your money is very safe and your risk of losing any of it negligible. Unlike for example stocks, where the value of your investment can go down as well as up, your savings account will deliver interest reliably year after year. Even if your financial institution goes bankrupt, so long as it was a member of the Canada Deposit Insurance Corporation, the first $100,000 of your money (per financial institution) is insured.

Of course, all of that safety comes at a cost. Savings accounts typically have some restrictions on them, for example on how many free withdrawals you can make each month. Higher interest savings accounts may also require a minimum deposit. You also cannot expect to earn much interest. The large banks typically offer a little over 1% interest on your savings, and this may require a minimum deposit. Smaller banks and credit unions may offer higher interest rates, but often at the cost of not being covered by the CDIC. Even then, while offered interest rates change regularly, you’d be lucky to find one offering 2% interest in the current market. For reference, Statistics Canada found an annual rate of inflation of 2% in September 2014.

Despite the low returns, you should still have a savings account. Even if they won’t earn you much money, having up to $100,000 of guaranteed savings is hugely significant. The first rule of investing is to only take risks with money that you can afford to lose, and savings accounts provide a saving method that is close to risk-free. It’s also easier to withdraw from a savings account than from many other savings instruments. Putting a good core of savings here will give you the security that you need to get more creative with the rest.

Guaranteed Investment Certificates

Guaranteed Investment Certificates give you a higher interest rate than your savings account in exchange for less convenience. You make a deposit (different institutions will have different minimum deposits, but you’ll probably need at least $500) for a fixed term, and receive a fixed rate of interest. Generally, the more restrictions your GIC has, the better interest rate you can get. Some GICs may allow you to withdraw money at any time without penalty, while others charge penalty fees for any withdrawal before the term is up. If you’re comfortable taking more risk, many banks also offer interest-linked GICs, in which the rate you receive will go up and down with interest rates. Your deposit is still guaranteed, but your eventual earnings can be more or less than the initial interest rate would predict.

Like with savings accounts, GICs with major banks are usually covered by the CDIC. The exceptions are any GICs with an initial term of over five years, and any GIC that isn’t held in Canadian dollars. The main risk associated with GICs is their longer-term nature. If interest rates on savings accounts suddenly rose, you’d still be stuck with the lower interest rate on your GIC and losing money compared to what you would have got had you put the deposit in a savings account.

The Canada Savings Bonds Program

These bonds are issued by the Bank of Canada and guaranteed by the Canadian government, owned by around three million Canadians, and are only available at certain times of year. Canada Savings Bonds are only available through the Payroll Savings Program, while Canada Premium Bonds can be bought through most banks and credit unions from early October to the end of November.

As of 2012, both types of bond are issued for a period of three years, with interest rates revised every year. The current issue of CPBs will have an annual compound rate of 1.19% if held for the full three years. CSBs are more flexible as interest is calculated to date when they are redeemed, but they carry a lower interest rate. When redeeming CPBs, partial years don’t count, so redeeming after 18 months will only get you the first year’s worth of interest. On the other hand, that loss of flexibility gets you a higher interest rate, and CPBs are more widely available than CSBs.

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