High Interest Savings Accounts

While writing my blog post on GICs last week, I also took a look at some of the high interest savings accounts out in the market today.

In the past, I have ridiculed high interest savings accounts, so most readers correctly got the impression that I think you should avoid them.

In a broad sense, that is still true. Most of the savings accounts in the Canadian market today are so utterly pathetic you may as well save yourself the hassle and keep money in a free chequing account where you do all your daily banking.

Moose Tip: Some good options for free chequing accounts include Tangerine and Simplii. There is no good reason to be with a big bank that charges you a monthly fee for your chequing account!

Thanks to the rising interest rate environment, a few bright spots have opened up in the savings account market over the past few months.

Right now, EQ Bank, a second-tier federal bank, is paying a whopping 2.3% interest on their savings account. Oaken Financial, another second-tier federal bank, is paying a solid 1.5% interest on their savings account. While Tangerine and Simplii are paying 1.25%.

All of these banks are CDIC insured, so provided you don't have more than $100,000 in a savings account with each bank, your money should be very safe. I go into more details on CDIC protection in my GIC post, so I won't bore you with those here.

Savings accounts should be used pretty sparingly for most people. But it varies depending on your stage in life. There are some reasonable uses for savings accounts.

Savings Accounts for Accumulators

Accumulators are working hard, earning as much as they can, maintaining a high savings rate, and investing aggressively. Savings accounts should not really be in the financial picture most of the time. Even for emergencies!

An accumulator should conduct their daily banking in their free chequing account while maintaining a small balance there. I personally don't see any benefit with keeping more than one month's worth of expenses in your chequing account at the low points.

For most people this means their chequing account will fluctuate from around $2,000 on the bottom end to maybe $10,000 on the top end. Your numbers depend on your pay schedule, your spending rate, when your bills are due, how often you contribute to your investment accounts, if you share a bank account with your partner, and so on.

The key for an accumulator is moving as much money as fast as possible from the chequing account (where income is deposited and bills are paid) into an investment account where it can be put to work.

In most investment markets, the more you invest as early as possible the better off you will be.

For emergencies you should have an already-approved personal line of credit waiting for you at the bank.

Your personal line of credit should have a credit limit equal to six months of expenses at the high side. However, you should not touch this available credit at all unless it is a true emergency.

True emergencies include income emergencies (job loss, severe illness, etc.) and some spending emergencies (unforeseen house or vehicle repair, death in the family, supporting a loved one who is in an income emergency, etc.).

If you have to use it, your aim should be to pay your line of credit off as fast as possible, even if that means setting aside new investment contributions for a few months.

The one scenario where a savings account may be worthwhile for an individual in the accumulation stage is when you are saving money for a specific large expense (well over $10,000) which is coming in the near future. This might be a vehicle, home renovation, home purchase, other something of that nature.

Savings Accounts for Retirees

When you are at the stage in life where you primarily live off your investment holdings, you need to become a lot more careful about how you manage your finances.

The majority of your money should be in your investment accounts invested primarily for growth. Alternatively, you could invest in a timing strategy for downside protection. Better still, consider two strategies to diversify your investment returns.

Depending on your personal situation, a good portion of your spending needs may be covered for through regular income. This can include CPP payments, OAS benefits, dividend income (from stocks or stock ETFs), interest income (from bond ETFs), or even some part-time employment or business income.

To keep things easier to manage with fewer manual electronic transfers, once you are retired you can set up your non-registered investment account so dividend income comes straight into your chequing account. Most dividend paying ETFs pay out quarterly or semi-annually while most bond ETFs pay out monthly or quarterly.

It is important to have some cash set aside for daily living expenses which are not covered by your regular income. It doesn't make sense to pull money out of your portfolio every month, triggering capital gains and trading costs while taking up your valuable time.

Instead, use a systematic method to pull money out of your investment account on an intermittent basis. Once or twice a year is good.

You should try realize gains or withdraw money from registered accounts in the most tax efficient method. The exact combination of RRSP withdrawals, TFSA withdrawals, and capital gains in your non-registered accounts will depend on your personal situation at that time.

If you have a high spending year, your spending may be tilted towards TFSA withdrawals and realized capital gains. In a low spending year RRSP withdrawals may form the majority of your investment income.

Since the withdrawals are not made frequently, they can be quite substantial in value. It would not be uncommon to need tens of thousands of dollars a year in these forms of income.

These large lump-sums should not be put in your chequing account. Chequing accounts pay no interest (typically), so your money will actually erode in value thanks to inflation costs.

Instead, set up a high interest savings account to hold this money. Shop around for an account that offers a higher interest rate along with free monthly money transfers such as Interac e-Transfer or electronic funds transfer to your chequing account.

Keeping this money in a high interest savings account will ensure your money generates moderate interest income while you are waiting to spend it.

Use of savings accounts in retirement can be instead of, or alongside a GIC Ladder. Just keep your overall cash balance in mind. Cash might be comforting, but too much cash is a problem.

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Great Rewards Require Sacrifices

Life can be super easy. Especially in our modern, first-world, wealthy, high safety net society. There is no reason why you need to intentionally work your musculoskeletal system, exercise your brain, engage dynamically with others, compete, beat others, lose to someone who is better than you, or truly fail at something that matters to you at any given moment or period of time. However, these things are precisely what makes you a capable, successful human being.

There are good and meaningful rewards which are the product of deliberate and thoughtful sacrifice. In contrast, no deliberate efforts result in fleeting rewards which often carry long-term damage.

The Elimination of Sacrifice

We live in time like no other. You can easily get a brainless 8:00 - 4:30 job that pays reasonably well. You can transport yourself everywhere you need to go on the entire planet in plush, climate controlled comfort. You can never take a chance, never make a difficult decision. You can avoid ownership of mistakes and never be truly honest. You can get through an entire 24 hour period without walking more than 200 steps. You can live quite effortlessly packing two or even three times your healthy body weight--there's even battery powered mobile assistance if you get really big. You can eat all the crap you want, drink nothing but concoctions of toxins, and smoke or otherwise inhale poisons. You can easily design your life so you are never more than an arms length away from a super-size soda and a bag of Cheetos. You can inhabit an office chair and computer desk by day and your couch and video game controller by night.

However, there's a cost to this almost infinite illusion of wealth and easiness that has never before been experienced by any living thing on Earth. It turns out humans, like all living species, are not designed to function well over the long term with all this comfort. Living your life with no real exercise, drinking soda pop and beer, eating Cheetos and French fries, telling lies and half-truths, and having bugged out eyes from electronic screens while living vicariously through virtual personas are awful choices in the long run.

About fifteen, maybe twenty years of this physical and mental gluttony results in massive health problems. Heart attacks in your late-30s or early-40s. A diet of pharmaceuticals to try control every bodily function from cholesterol to blood pressure to glucose and insulin--all with nasty side effects. Your knees or hips need to be replaced because they are "worn out" (despite your obvious minimal use of these joints). The physical and emotional costs cannot be measured: depression, anxiety, pain, surgery, lethargy, and cerebral atrophy are no joke. These repercussions are an alarming over-correction to your years of self-inflicted, existential abuse.

These same products of physical, mental, and emotional health can seamlessly apply to financial health also. It's super easy in our society to live in an illusion of financial ease. Credit cards loaded with thousands of dollars in spending power come in the mail after completing a two minute online application. Your bank probably reminds you every month or so that you are pre-approved for a five figure line of credit. Every major and minor purchase can be financed with money you never earned--as long as you pay a monthly fee for the privilege. No one forces you to save a dime. And, if you're from B.C., you can apparently get by on a net negative savings rate for decades without repercussions.

However, this means a long-term miserable existence of reliance on others--the exact opposite of personal freedom and dignity. You will need a steady job with a bi-weekly paycheque, you need "free" government health care, you need CPP/OAS/GIS and other three-letter programs to provide for you financially, you need your rip-off bank that you probably hate, and you need an organized power that slowly strips away your freedom in order to serve you. It results in a vicious culture of dependence.

Even rare and seemingly positive events like winning the lottery or receiving massive inheritances are not true rewards. Often these instant, massive financial windfalls which are not earned cause long-term destruction. Families are torn apart, friendships quickly wither, the sudden millionaires develop mental health challenges, addictions are formed, and financial ruin is around the corner. Again, it is as if the natural order of things was broken. To correct the system some supernatural forces intervene, inevitably returning things to their original path. However, there's that familiar and rude over-correction as some strange, unexplained punishment is dished out for the disturbance of that natural order.

Cultivating Meaningful Rewards

The relationship between sacrifice and reward is most interesting. There are very few things in life that truly come easy in every sense for the long term. We need to work hard and strive diligently to cultivate good outcomes. Good outcomes, the ones that really are meaningful to us, are often the outcomes which seem the farthest away and most difficult to reach.

It turns out there are great long-term incentives in place that reward a little punishment and promote a little risk taking with regards to your personal well-being. Regular aerobic activity mixed with the occasional grueling physical punishment does wonders for your physical structure. A diet of greens and fungi, complex and fibrous carbohydrates, and quality whole meat keeps your body lean and your mind sharp. Regular reading, constant learning, and intense thoughtful debate with friends and acquaintances helps your mind age slower than your body. Telling the whole truth and owning your mistakes promotes others to trust you, grows your personal happiness, and completes your psychological processing.

Taking risks of various forms helps us experience the same emotions and thought processes that ensured our species survival and dominance in a world filled with much bigger, much scarier organisms. We are innately designed for challenges. When we are no longer challenged by survival necessities in the natural environment, we need to mimic those challenges in our modern world.

Likewise, true financial success earned through hard work, grit, and better decision making is often lasting financial success. The process of sacrifice brings the reward as well as the ability to manage that reward. Studies back this up, self-made millionaires are happier and more successful in life than inheritors. If you want to be wealthier and happier, you need to earn it. That means sacrifice and hard work; a continual process of getting your financial condition to a better and better place.

A Strategy for Meaningful Financial Rewards

Start with your spending. Carefully analyze everything you spend money on and determine the real value of the goods and services you acquire. Are they truly worthwhile, or are they a form of compensation for your personal laziness which results in long-term costs? Are you attempting to compensate for self-induced stress and unhappiness with "stuff"? Are you chasing the expectations of others to your own financial and emotional destruction? Sacrifice the unnecessary and meaningless extras in life. Instead, work towards a realistic, longer-term set of goals.

Begin saving. Once you've got complete control over your spending, you'll find there's a pile of cash left over at the end of every month. Hundreds or thousands can be funneled into savings or debt pay-down. While debt accumulation is a symptom of negative net production today, savings is simply storing your excess production for your future benefit. We can produce well for a long time, but as our body begins to break down with age that excess production of younger years comes in handy. The rewards of dedicated saving over time can be very fulfilling: you can move to a less stressful job, take a sabbatical to reorient yourself, enjoy an early retirement or semi-retirement, travel and explore, or contribute to the development of a better world around you.

Grow your savings with investing. There are countless ways you can put your excess production (savings) to work by contributing to other's ambitions and taking a fair portion of their return. While not without flaws, the concept of mutually beneficial financial relationships runs deep through our investing world. The emotional strength required to invest properly is a modern form of risk taking. When investing, you experience all the emotions that make you stronger: fear, greed, loss, gain. If you make logical and calculating decisions, the rewards will show themselves over time. However, if can't muster the strength and emotional control required for success, your results will be lackluster.

Over time, when done correctly, your overall wealth will grow exponentially as resources are funneled to productive endeavors. You can invest very passively, buying units of just one single ETF your entire life and watching the growth. You can also choose a strategy that limits drawdowns by converting your savings to safer bonds when business cycles change. Alternatively, you can invest aggressively to make the most of growing businesses while always keeping a large portion of your money in the safest assets.

The importance of these three elements of financial success are in precisely that order: spending control, savings growth, and investing. When all three elements are used together, the rewards will be nothing short of spectacular. But there are no true shortcuts.

Comments & Questions

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