Currently, Canadians are holding $103 billion dollars in regular savings and chequing accounts. Frankly this surprises me considering that most bank accounts are paying a meager 0.25%. Back in 1981, these same savings and chequing accounts were paying 13% to 14%, but those hey days are gone.
Here’s the problem: A $1,000 balance in savings accounts will compound to $1,012.56 after 5 years. That’s barely enough interest to pay for lunch for 2 at McDonald’s. A $1,000 balance will compound to $1,025.28 after 10 years. If you adjust for inflation, your original $1,000 is now the equivalent of $883.45.
We need to take a look at ways to enhance your returns.
“Just in case money”
It’s no secret that most people who keep balances in their bank accounts keep money there ‘just in case’ something should come up. Just in case money is important. According to many financial books everyone should have emergency money. The amount of emergency money is debatable but it can range anywhere from 1 to 6 months salary.
So what are the alternatives?
- Money Market accounts. Money market funds are mutual funds that invest in government treasury bills and short term notes. Often, banks will take that $103 billion in chequing/savings accounts and invest in these same T-bills to make money on the spread. Investing in Money Market funds enables you to earn the spread instead of the banks. Currently money market accounts are yielding in the range of 3% to 5%.
There are also money market accounts in the market place that offer chequing privileges making them more like bank accounts. Two examples are the Trimark Interest account and the Mackenzie Industrial Cash account.
Money market accounts may not be as convenient as bank accounts but the higher interest is probably worth the slight lack of convenience.
- High Interest Bank Accounts. Non-mainstream banks like ING, Manulife Bank, and President’s Choice Bank are examples of financial institutions offering much more than your typical bank account. All of these institutions are currently offering at least 5% on their bank accounts. These institutions are able to offer higher interest rates because they do not have branches or tellers making them more cost efficient.
At 5%, you will earn more interest in one year than if you compounded 0.25% for 20 years. That’s significant!
- Invest and get a line of credit. People who keep balances in their bank accounts have money that is unproductive, not only because of the low interest earned but also because of the inefficient taxation of interest income.
One of the strategies to deal with this is to keep low balances in your chequing account and invest the money into no-load mutual funds. Investing no-load gives you access to the funds in case of emergencies.
Also, you can utilize lines of credit for access to cash if necessary. If you are not good with managing debt, then a line of credit can be dangerous. Most people, however, who keep significant sums in their bank accounts are typically people who are better at managing their money.
This strategy may add some risk to the financial picture but it also represents a much more effective use of assets.
- Manulife One. I am always careful to endorse products in a public forum like this but Manulife One is the only product of it’s kind in the market place. Manulife Financial has come up with a product that wraps your bank account, mortgage, credit cards and other debts into one account.
In other parts of the world, like Australia, the concept of ‘one’ account is a mainstream concept. However, here in Canada, it has yet to catch on. The message here is you are better off paying down debt than keeping any extra money in your savings/chequing accounts. Manulife has created a product that allows you to do exactly this without necessarily sacrificing on the need for ‘just in case’ money.
Manulife One is not for everyone. If you want more information, please contact Manulife Financial or visit their website www.manulifeone.com.
If you are the type of person who keeps significant sums in your bank account, the first step is to find out how much money you are earning. Chances are, you are losing money because it is not keeping up with the cost of inflation. Talk to your financial advisor or banking representative about alternatives to keeping money in your bank account.