Normally I am not one for completely misleading headlines like the one in this article but the truth is it may not be misleading at all. Canadians have over $100 billion dollars in regular savings and chequing accounts. Add in the fact that there is another $75 billion in money markets and you have a lot of money sitting in short term accounts earning next to nothing. Frankly, this surprises me considering that most bank accounts are paying a meager 0.25% or less.
There are two very important questions that you need to ask yourself:
- How much interest are you earning in your bank account?
- How much are you paying in service fees for your bank account?
In most cases the answer to question one is “little to nothing” and the answer to number two is “way too much”. There is a real opportunity to change the way you do banking so that you turn this situation around. Several financial institutions now offer high interest bank accounts, many of which have low minimum balances and no fees.
What rates are these banks offering?
Currently, there are about a half a dozen institutions offering high interest bank accounts that range from 0.8% to 1.7%. Some banks will offer attractive short term incentives to get you to open an account. for example, Tangeine (who is offering up to $50 in bonuses and 2.4% interest for 6 months).
While these interest rates may not seem overly high, keep in mind that it is higher than most money market funds and higher than the 1-year posted GIC rate at the major banks.
In fact, more often than not they pay higher rates than conventional bank accounts, money market funds, cashable GICs and sometimes even higher than shorter term GICs. The benefits are very clear – high interest and less fees. So why would someone not use these high interest bank accounts?
- Savings vs. Chequing accounts – In some cases, these high interest bank accounts act strictly as savings accounts. However, there are some institutions like Tangerine that offer chequing privileges for free. You can make the switch to Tangerine easily with their Switch Assistant. There are solutions for both savings and chequing accounts.
- Awareness – I think many investors are just unaware of the options. For many, high interest bank accounts are foreign to them.
- Convenience – In my opinion, this is probably the biggest hurdle that you must overcome. Mainstream bank accounts offered by the 5 big banks have been part of our habits for so long that it can be difficult to change the way in which we bank. Many of these high interest accounts are offered by companies that we do not naturally relate to banking like Tangerine, President's Choice, or Manulife Bank. I know many people who have banked at the same bank for 30 years or more. Regardless of all the change in personnel, the fact that the bank has been there for as long as they can remember, why should they change?
- Security – Many investors fear not knowing much about these banks that offer high interest accounts. Part of the fear of the unknown is the lack of brand recognition and the fear of the bank going under. There are two things to keep in mind. First, find out if the bank is a member of CDIC and whether you would be covered up to the $100,000. In most cases, I think you will find you will be covered. Secondly, keep in mind that many of these banks are part of the big 5 banks. For example, President's Choice Financial is actually owned by CIBC, and Tangerine is owned by Scotiabank. BMO has also entered the high interest bank account market.
The bottom line
When you simply do the math, you can increase your returns on your bank account by 10 times. This in itself is reason enough to take the time to look into high interest accounts. You might be amazed at what you will find: It is possible to get your bank statements and actually earn interest each and every month. It is possible to reduce the amount of fees that you pay without a lot of effort or bartering.
Next week, I want to share with you some real life examples of people who have started reaping the benefits of high interest bank accounts. If you have a story to share about using high interest banks accounts, I would love to hear from you. I think the more people that use high interest bank accounts; the more pressure there will be on all banks to offer higher interest rates and less fees when it comes to banking.