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What Is A Savings Account?

For your day-to-day banking needs you’ll want a chequing account. That’s the one that’s linked to your cheques (hence the name) and lets you pay your bills. Many chequing accounts charge a monthly fee that’s waived if you keep a certain amount of money in it, but you can also find good free chequing accounts from credit unions or online-only banks.

The biggest downside to chequing accounts is that they often earn little to no interest. That’s especially painful if it’s combined with a minimum amount you need to keep to waive the fee, as you miss out on the interest you could be earning in a different account.

For any money that you don’t need right away, it makes sense to put it in a savings account.

 

What is a savings account?

A savings account is a bank account that you only use to save money. You’ll earn substantially more in a savings account than you would in a chequing account, and your money is completely safe.

Your money can’t be stolen from the bank – even if someone did manage to hack your account and transfer your money, banks have fraud protection for their accounts that reimburse any fraudulent charges.

Your money is even safe in the event the bank goes bankrupt. The Canada Deposit Insurance Corporation insures your deposits up to $100,000 per insured account per bank, so if the bank disappeared overnight you’d still get all your money back (if all your money was below $100,000 per account).

 

What can a savings account be used for?

Most savings accounts from large banks like RBC or CIBC can’t be used for much. Their only purpose is to safely store your money until you need it later. Although you can use them like a chequing account, high withdrawal fees and limited monthly transactions make them impractical to use for other purposes.

 

Savings Account Fees

Some of the most common savings account fees are:

Charge

Cost

Monthly Fee

$0 - $15/month

Transaction Fee

$0 - $5 per transaction
$1 per transaction above monthly limit

ATM Withdrawal Fee

$2

E-Transfer Fee

$1, plus any additional transaction fees

 

You may be charged all, some, or none of these fees. Make sure to check before you sign up for a savings account.

There are ways to avoid bank fees and save money, if you know where to look.

 

How does a savings account earn interest?

You already know a savings account earns interest on the money you put in it. But how exactly does it get paid, and are you taxed on it?

Savings account interest is calculated daily but paid monthly. That means you can’t put in a large amount of money the day before interest is paid and get a bunch of money for free. The money only earns interest when it’s actually in the account.

Interest is always shown as an annual rate, but calculated daily. In order to find out how much interest you earn per day, just divide the interest rate by 365; that’s your daily rate. Then just multiply your daily rate by your balance to find out your daily earnings.

If you have $10,000 in a savings account earning 2.3% interest, your daily rate is

2.3% ÷ 365 = 0.0063%

You earn 0.0063% per day, or 63 cents per day. Over a year, that works out to $230, or 2.3% of the balance.

 

Why do savings accounts give interest?

Something you may be asking yourself is why savings accounts give interest at all. Why are banks paying you to put money in them?

It’s because banks make money by lending out money, but they can only lend money that they have. When you deposit money in a savings account, the bank is able to use that money to give out mortgages, loans, and make investments.

If there was no interest, there’s no incentive for people to put money into a savings account. If it made no difference whether money is kept in a bank or in a mattress, then no one would go for bank accounts.

The interest that banks offer will always be less than what they think they can earn with that money. For instance, a bank that offers 2% or more believes that they’ll earn more than 2% on their investments.

Why do big banks have such low interest rates?

By that logic, it suggests big banks that have interest rates as low as 0.35% don’t expect to make much money. But the reality is that big banks often make even more money than smaller banks. Part of the reason they earn so much is because they pay so little in interest and charge high fees and interest in other products.

The big banks in Canada are brand powerhouses. I’d wager that 100% of Canadians over 18 could name at least 1, while the vast majority could even name all 5. Because of this recognition, they know people will get bank accounts with them despite their interest rates. Customers may also have several products with their bank already and want a centralized monetary system. While there’s not necessarily anything wrong with wanting one central hub for your money, it often pays to pick and choose the best products from whoever offers the best. With advances in banking technology, keeping track of your money – even across multiple institutions – has never been easier.

 

Are you taxed on savings account interest?

Yes, interest on savings accounts is taxable income. The only way to avoid paying tax is to have a Tax-Free Savings Account, which is completely exempt from tax. You can view a list of the highest-interest TFSAs here.

Otherwise, you have to report interest earned in your savings accounts on your taxes. If you earn more than $50 in interest over the course of a year, your bank will likely provide you with a T5 (form for reporting interest). If you don’t make more than $50, you’ll still have to report your interest, but the bank may not give you a T5.

 


Chris Chris 05/08/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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