Many investors remember the days when high-interest savings accounts yielded what many would consider a very decent return. But in the age of ultra-low interest rates, high-interest savings accounts now pay between 1 and 2%.
Are the days when interest rates on savings accounts were high officially over?
“I think it’s always a function of general interest rates. And if people get zero on their money and then an account can earn you three-quarters of a percent – although it doesn’t feel like it – that’s still “high interest”. So 1.25%, right now, for a daily interest savings account is pretty good,” Ted Rechtshaffen, president and CEO of TriDelta Financial, said in a phone interview.
An analysis of rate comparison website RateHub.ca shows that most high interest savings accounts offer a rate below 2%.
The highest non-promotional rate is offered by Wyth Financial at 1.55%. Wyth is owned by Saskatoon-based Concentra Bank and revealed earlier this month that it would be purchased by alternative lender Equitable Group Inc.
In one interview with BNN Bloomberg on February 8, Equitable Group Chief Executive Andrew Moor touted the high interest rates on savings accounts offered by Equitable-owned Wyth and EQ Bank, which is currently 1.25% .
A number of factors are used to determine the rate for a high interest savings account, including the Bank of Canada’s benchmark rate and competition among financial institutions – a lender wanting to attract more deposits could increase savings account rates to attract customers.
A 2019 survey by BMO Capital Markets found that about half of 630 respondents nationwide said they have a high-interest savings account.
But as inflation hits multi-decade highs, it’s worth bearing in mind that ultimately the money left in a high-interest savings account loses its purchasing power.
“Those 1.25% high interest savings accounts – after inflation and taxes, you’re behind the eight ball,” Robyn Thompson, founder and president of Castlemark Wealth Management, said over the phone. “So it’s very important to try to understand what the savings account is for.”
“I think that’s the first place to start. What is your definition of saving, and allocate your resources accordingly to ensure that you will not continue to erode your purchasing power. »
That definition, she said, could be emergency savings, the cash portion of your overall investment portfolio, or part of a savings plan for an upcoming major purchase.
Meanwhile, Rechtshaffen said if you need access to your money immediately or in the short term, a high-interest savings account is probably the best place to be. If not, that money could be put to better use elsewhere.
“We see a lot of people who have a lot of money in their accounts, whether they’re getting 1.25% or they’re getting zero. […] But most of the time that money is really meant to be a longer-term investment, and people have either sat down on it because they don’t know what to do with it, or because they’re too nervous for it. invest. said Rechtshaffen.
‘NO FREE MEAL’
For those looking for a higher return, a move up the risk ladder is in order, but it all depends on investors’ risk tolerance.
“It all comes down to risk and return, and there’s no free lunch,” Thompson said.
She said that while an investor is looking for an absolute guarantee that their money won’t be lost, their options are usually limited to savings accounts and guaranteed investment certificates.
“You’re looking at a rate of return between two and two and a half percent, so still below the rate of inflation and after taking taxes into account, you’re still losing money,” Thompson said.
Beyond that, she says, investors can consider exchange-traded funds, mutual funds, or, depending on your knowledge of the market, individual stocks.
“I think for most people you start dipping your toe into an exchange-traded fund portfolio or a mutual fund or a product that gives you diversification across the board that has an allocation towards equities” , she said.
“So you have the potential to earn a higher rate of return than inflation, while maintaining a low tolerance for risk. So now it becomes a conversation or a dance about how much risk am I willing to take to get the return I need? »
For some investors, high yielding dividend stocks are also an option.
“These really are the proven way to invest your money for higher returns,” Thompson said.
If an investor has the capacity and appetite for that level of risk, she said the key is to get an income stream that meets their cash flow needs so they don’t have to dip into their portfolio. .
” I was looking for [companies that have a track record of] 25 years of consecutive dividend increases. Most Canadian banks and utilities meet this criteria. And you want to see those long-term dividend increases,” she said.
“Dividend yields can essentially drop in value during periods of market volatility, but that dividend you get should provide a cushion.”
A ‘FAVORITE’ OPTION
Meanwhile, Rechtshaffen recommends using preferred stocks as a way to get a higher return with lower volatility.
Preferred shares are a hybrid investment in that they combine the characteristics of stocks and fixed income securities. They are like equity in that they give you ownership of part of a business and the stock price can go up or down. They also have a face value, usually have a fixed payout, and don’t have voting rights like a bond.
Rechtshaffen said he sometimes suggests rate reset preferred shares, which tend to do well in rising rate environments, and fixed rate preferred shares, where the dividend does not change.
“It’s not that there’s no risk in preferred stocks because they go up and down for sure,” he said. “Part of it is you have to know what you’re buying because sometimes there are a few bells and whistles, so you have to understand that.
“That said, most of these investments will – most of the time – offer returns that are significantly higher than what you would get in cash.”
NOT AN INVESTMENT ACCOUNT
Both of these finance professionals agree that high-interest savings accounts are best used to house emergency funds, which typically amount to three to six months of living expenses.
“Have money in your high-interest savings account to meet those short-term expenses, but don’t treat a high-interest savings account like an investment account, because that’s just not not the case,” Thompson said.
“He’s there to protect you in an emergency,” she added. “So I think from a cash flow perspective, having access to capital is very important.”
“You don’t want to be in a position where your investments are allocated to high-risk investments and you have to dip into the portfolio to repay an emergency – because you could go down in a volatile market and you’ll crystallize your losses.