As financial experts tell, to make a fortune a person should save regularly 10% of his monthly revenues. To avoid the seduction to outlay these investments, gurus recommend establishing automatic payments from your checking to the savings account. But along with such a chance, some extra difficulties emerge, namely selecting a company and a savings product. Should you choose a GIC/term deposit, high-interested savings account, TFSA, RRSP or RRIF? It is better to choose a bank (like TD, RBC, Scotiabank, BMO, CIBC) or a credit union (like Coast Capital, North Peace savings, Island savings, Oaken, Kootenay, Westminster savings and others)? How to compare investment services? Which their conditions to research? What the period and the currency to choose? Bankchart.ca assists you with the selection in this article.
Step 1. What is a savings account? What are the kinds of such investments?
A savings account is a financial account at a bank, credit union or another financial company, opened to earn percentage revenues or to save up enough for a specific purpose. Depending on the opportunities to deposit and withdraw funds from the accounts at any time without penalties, financiers divide investment accounts to:
1) term deposits or guaranteed investment certificates (definition) – allow the clients to gain the highest interest rates among deposits but have no options to replenish or to withdraw money without fines to the percentage rate. Such accounts are opened for a particular term, for example, 1,3, 9 months or 1, 3, 5 years or others. The frequency of the repayment can be monthly, quarterly, semi-yearly, per annum or at maturity. On the same time, their rate of return is commonly lower comparing to stocks, mutual funds and bonds.
2) savings accounts – propose smaller percentage rates, but enable its holders to deposit additional funds or withdraw them from the account at any time without penalties. They can be used to pile up funds for a certain purpose and are connected to a current account.
Depending on a client’s status, personal deposits can be:
- basic - is a standard account for a common client – an adult person, who is a resident of Canada
- senior – for Canadians with the age 60 years and higher, who receive social payments
- for youth savers – assist kids to learn the fundamentals of accounts management. Such accounts usually have the possibilities to withdraw and to replenish money and are opened by adults on behalf of their kids
Also, deposit accounts can be divided into:
- high-interest accounts – propose raised percentage rates but also commonly have additional fees and limits to operations with the account. So, you should do research first and consider all deposit parameters before selecting it
- in USD – an individual can open a savings account if foreign currency, the most used of which is the US dollar. It will suit, for example, if you have a business or own a house in the US
- joint – involves joint account management if the account holders have common financial goals. As a rule, such accounts are opened by relatives or friends
- tax-free savings account (TFSA) - unlike other savings accounts, they do not imply taxation of interest income. At the same time, Canadian banks, so that the client does not abuse this possibility, may limit the amount of funds that may be placed on such deposits (so-called contribution limit).
Also tax-free are a registered retirement savings plan (RRSP) registered with the Canadian federal government and partly a registered retirement income fund (RRIF), which is also opened by Canadian banks but have wider options for investing, like savings deposits, bonds, GICs and mutual funds. According to the rules, RRSP can be opened by each Canadian under the age of 71 to save up money for his retirement. After reaching 71 years old or early the RRSP account can be changed to RRIF so that you can make withdrawals within the deposited earlier funds.
Step 2. How to compare personal deposits?
Percentage rates are the most important argument of personal deposits because it determines the level of interest incomes which you will receive in the future. According to our investigation, their value ranges from 0,01% to 3% for savings accounts, from 0,05% to 3,27% for guaranteed investment certificates (GICs) and from to 0,05% to 3,38% for term deposits.
Financial institutions can propose high introductory percentage rates. But such conditions work only several months. Besides, such rates commonly act just for new clients and not for who had savings accounts before. So, after such a period you should do research again and appraise whether the standard rate is also attractive.
An interest rate can be charged on balance on your account, only on the amount above a particular limit, or on all the balance if it exceeds a certain amount. Also, some banks can propose you compound interest. According to such a proposal, the interest is not paid to a client but is added to the balance. So, the next period (month) the interest is charged on both the initial sum and the added percentage revenue. The more frequent the rate is charged, the higher is your income. Such options increase the level of interest paid at the maturity.
You should also consider other essential savings account features, like:
The frequency of payment – financial organizations, can pay interests on yearly, semi-annually, quarterly, monthly, or at the end of maturity. The more frequent the interest is repaid, the lower usually is the percentage rate
The minimum balance/sum – depends on the account type. It can be zero for a savings account and usually 500 - 1 000 CAD for term deposits and GICs. But, its size commonly increases if you want to get a higher interest rate
Making transactions – deposits can have features of free replenishment and withdrawal (with mobile banking, ATMs, tills, etc.) or don’t have such options
Servicing commissions – savings accounts usually don’t have any servicing fees, but tariffs for making transfers and withdrawals can occur. Also, financial organizations can set a range of free operations for an account per month
Limitations to clients – Canadian banks can establish requirements to a customer’s age, residence, social state and level of incomes
Besides the above you should also consider the following parameters:
1. Whether the asked bank has both GICs, term deposits and savings accounts?
2. Whether the financial organization provides banking via Internet and applications?
3. Whether the credit company provides you with privileges and bonuses?
4. Whether the bank has branches and ATMs not far from your place of working or living?
Step 3. Features of the opening of some types of savings accounts
Depending on the type of deposit account, the following features of its opening may arise:
- For high-interest accounts it is worth considering the following features:
are transactions on the account free, or some fees are charged?
- is it needed to open additional transaction or savings accounts in the bank?
- what is the level of standard rate after the promotional period?
- are there any restrictions to replenishments, withdrawals and balances to open the highest rate?
- TFSA – there are 3 kinds of TFSAs which can be proposed by a bank, credit union, insurance or trust company:
- an arrangement in trust
- an annuity agreement
Consider the following limitations before opening such an account:
- you can replenish up to your TFSA contribution room. A duty is charged to all deposits overtopping your TFSA contribution room
- direct transactions are to be made by your bank
- you are able to replace the sum of the removings in the same annum only if you have accessible TFSA contribution room
- removings will be appended to your TFSA contribution room at the start of the following annum
- Opening a join one, you should discuss terms with the co-holder about the rules of using the account. Also, you should study a copy of the agreement and get known about:
- a bank’s policy on the account
- how to manage it
Canadian banks can issue redeemable and non-redeemable GICs. Using the first ones you can withdraw money before the maturity without penalties, but additional limitations can be established by the financial organizations. Non-redeemable don’t have such an option and may be linked to a security market or a mortgage.
Step 4. How to open a savings account (online)?
Most savings accounts can be applied to via a site of a financial organization. To open a savings account commonly you are to be eighteen years old or higher and to have a Canadian residence. But for youth saver accounts the age requirements can be decreased, for example, to fourteen years.
Also, the financial organization may require to append copies of ID, like
- a driver's license
- a birth certificate
- or a passport
to the online application. Online identification usually lasts 15-20 minutes.
After filling the online application, the financial organization will open you a savings account remotely if you were its client before. But if you were not, you must visit the financial organization's office to affirm your data.
Some accounts suppose remote management and even have online advisors. And don't forget to pay taxes from your interest returns.
Choosing a savings account, you should consider your goals, financial possibilities and the product parameters. If you want to have free access to the invested funds, you should select a savings or a high-interest savings account. If you expect that you will not need the invested money during a particular period – you may choose non-redeemable GICs or term deposits. If there is a risk that you may need the invested funds one or more times – then the redeemable GICs will be preferable. If you travel a lot to the neighbouring country or have a house there – select a US dollar one. Pick out a children account to teach your kids the foundations of "financial grammar" and a joint account if you want to share the account management with additional persons.
Choosing a savings account, you should take into account the size of percentage rates and also the frequency of payment, the minimum balance/sum, the possibility of making transactions, servicing commissions, limitations to clients and other parameters.