Top Savings and Interest Earning Options

Are you searching for the ideal place to keep your money while earning interest? Numerous options are available for investing your hard-earned funds, but not every choice will yield interest. Even among those that do, the interest rates can be low, prompting many to seek the best avenues for growing their savings.

While accumulating interest is appealing, it may be wiser to consider investing your money based on your unique circumstances. Ultimately, the best course of action depends on your financial objectives. Below are some of the top options for saving money while earning interest.

Assess Your Time Frame

Before deciding where to earn interest on your funds, understanding your time frame is crucial. If you need the money for a significant purchase within five years, it’s considered a short-term frame. Conversely, if the funds can remain untouched for six years or more, you have a longer investment horizon. This aspect directly influences your investment choices.

For instance, if you’re saving for a home down payment within two years, a more cautious approach is necessary due to the limited time horizon. Opting for riskier investments could result in losses right before you need the cash. Therefore, safe options like high-yield savings accounts, GICs, or bonds are advisable to protect your money’s value.

In contrast, if your savings are earmarked for retirement several decades away, you might feel comfortable engaging in riskier assets (such as equities) that have the potential for better returns over time. Riskier investments might see more fluctuations, but as long as you don’t need the cash for many years, you can afford some market volatility. As your financial needs approach, you can gradually move into safer investments.

Regular Savings Account

For many individuals, a bank’s regular savings account is a common choice for saving money and earning interest. Since these accounts differ from checking accounts, they are less likely to be used for daily expenses. It’s a simple matter of depositing funds and letting them grow, right?

Not necessarily. While savings accounts undoubtedly offer convenience, there’s a significant drawback. If your account is with a traditional bank, particularly one of the major players, the interest rates may be quite low. Additionally, account maintenance fees could further diminish your returns. While savings accounts serve the purpose of earning interest, there are often superior alternatives.

High-Yield Savings Accounts

For over 20 years, high-yield savings accounts in Canada have outperformed traditional bank offerings by a considerable margin. When I first opened my ING account (now known as Tangerine), I enjoyed an impressive 6% interest rate. Although current rates don’t match that figure, many high-yield accounts still surpass standard savings accounts.

Take EQ Bank, for instance, which has reliably offered some of the best interest rates on savings accounts. While rates have fluctuated in response to the Bank of Canada’s adjustments, EQ Bank ensures competitive rates year-round without the gimmicks of promotional offers. This digital bank, notable for having no account or transfer fees, makes it an excellent choice for earning interest.

Today, numerous high-yield savings accounts can be found, with EQ Bank and Tangerine being the most established. Meanwhile, newer institutions like Motive Financial and LBC Digital are also providing enticing interest rates. In my opinion, digital banks represent the best option for saving money and accumulating interest.

Guaranteed Investment Certificates (GICs)

GICs remain a classic investment choice that continues to attract many investors. These term deposits allow you to select the duration (e.g., 90 days, one year, two years, five years) and receive a predetermined interest rate. Generally, longer terms come with higher interest rates.

The appeal of GICs lies in their safety, offered by reputable financial institutions, making them a favored option for those seeking to save money and earn interest. The downside is that your funds are often locked in for the term length. While cashable GICs exist, they may forfeit some interest. Many individuals opt for high-yield savings accounts for their flexibility, as they often offer interest rates close to those of GICs.

Nonetheless, including GICs in your investment strategy can be prudent, particularly by creating a GIC ladder—purchasing multiple GICs with varying terms (1-year, 2-year, 3-year, etc.) ensures regular access to cash as one matures each year, allowing for continued portfolio growth.

Equity Index Funds

Index funds have gained immense popularity over the years, primarily because their management fees (MER) are lower than those of mutual funds. For context, the average Canadian mutual fund charges an MER ranging from 2% to 2.5%, while index funds and ETFs typically charge below 0.50%. This translates to a potential saving of 1.5% to 2% over time—an impactful difference when compounded throughout your investing journey.

If you’re seeking a solid option for saving money and earning interest, consider a fixed-income index fund. These funds expose you to a range of fixed-income products, including GICs, treasury bills, bonds, and cash, allowing for diversification without the need to manage multiple investments.

For those willing to embrace a bit of risk for potentially higher returns, index funds are still a favorable alternative. Investing in an equity-focused ETF allows for participation in stock market growth. All-in-one ETFs like VGRO and VEQT simplify the investment process—acquiring just one fund can set you on a prosperous financial path as you continue to invest and allow your money to appreciate over time.

Annual Interest on $10,000

Now that you’re aware of the best locations to save money and earn interest, how much can you actually earn? This largely hinges on the interest rate. Imagine you invest $10,000 in a high-yield savings account with a 1.5% interest rate. By the end of the year, your account would grow by $150, resulting in a total balance of $10,150.

Interest on savings accounts compounds annually, though it is disbursed monthly. This means you’ll effectively earn interest on both your principal and accrued interest in subsequent years. In practical terms, your 1.5% rate would apply to $10,150 after the first year, leading to a balance of $10,302.25 by the end of year two.

Admittedly, these figures may seem modest—typical returns for fixed-income assets. However, investing in equities could yield annual returns between 4% and 6%. With continued investment, your savings can grow rapidly.

Safest Investment Options

If preserving your capital is your primary concern, most fixed-income securities are deemed safe. These products bear minimal risk, which is why they offer lower returns. However, for absolute certainty, treasury bills represent the safest choice. Issued by provincial and federal governments, T-bills guarantee both the principal and interest, ensuring you won’t incur any losses. You can purchase T-bills from many financial institutions.

While savings accounts and term deposits may not provide 100% security, they come close, primarily due to insurance from the Canada Deposit Insurance Corporation (CDIC), which covers eligible deposits up to $100,000 per account. Almost all banks are CDIC members, offering a substantial layer of protection. If you work with a credit union, they have their own insurance provided by provincial authorities.