Retirement & Savings

How to benefit from rising interest rates

Hey Savers: Interest Rates Are Rising

You’ve probably heard that soaring inflation has become a worldwide economic issue. Increased demand and frequent supply shortages are causing costs to surge. As one example, think about the price at the pumps when you fill up on gas.

 

Moderate inflation is okay and good for the economy, but at today’s levels, it’s troublesome and can hurt economic growth. That’s why the Bank of Canada has been raising interest rates at a frenzied pace to help tackle high inflation. When interest rates go up, borrowing money becomes more expensive. In turn, consumer spending and willingness to take on debt will decrease, which helps control inflation.

 

On the flipside, saving money becomes more rewarding when interest rates move higher. With savings accounts paying more interest than they have in many years, it’s time to take a closer look at the humble (but useful) savings account.

Before you get too excited…

After years of near-zero interest rates, savers are finally being rewarded – but there’s a catch.

 

Most savings accounts are somehow connected to general interest rates, so when market rates go up, so can the interest earned. The catch? Although many financial institutions are quick to lower interest rates on savings accounts as market rates decline, they can be slow to increase their rates on the way up. Also, it’s unlikely the interest earned on savings accounts can keep pace with inflation, so you’re at risk of losing some buying power when keeping money in a savings account.

Savings accounts are great for short-term needs

Since you’ll likely lose out to inflation over time, savings accounts are best used for short-term needs and money you can’t afford to lose. They’re also great as an emergency fund – read more about that in Red alert: What is an emergency fund and do I need one?

 

Using a savings account for short-term goals helps reduce financial stress and keeps you out of debt (or lowers your level of debt). It can also prevent you from drawing upon your other investments for cash or disrupting your long-term investment strategy.

Savings accounts are terrible long-term investments

While savings accounts have their uses, let’s face it … earning a return that matches or exceeds inflation over time isn’t one of them. Keeping money in savings accounts instead of an investment portfolio designed to help you reach your long-term goals is a sure way to lose buying power and fall short of those goals. You can read more about this topic in Saving vs. Investing: Which is Right for Me?

If you’re unsure whether to save or invest, talk to your advisor for a plan that works for you. Also keep in mind that it’s not necessarily one or the other. You can tuck away cash in a savings account for a rainy day (or to keep some of your money safe), but you also need to invest so you can grow your wealth over the long run.

3 common types of savings accounts

Not all savings accounts are, well, accounts. If you want to maximize the interest you earn on savings, consider your options. In all cases, interest is usually calculated daily and paid monthly, based on a published annualized interest rate that fluctuates over time.

 

1. High Interest Savings Accounts (“HISA”)

 

These are typically offered by chartered banks and credit unions. Be aware that some financial institutions offer promotions where the advertised interest rate is higher in the first few months, but then drops considerably. Others may have restrictions on minimum balances and how often you can withdraw. There may also be monthly fees or transactions fees that eat away at your interest. HISAs often provide deposit protection through Canada Deposit Insurance Corporation in the case of chartered banks, or may have provincial backing in the case of credit unions.

 

2. Investment Savings Accounts (“ISA”)

 

These are offered by full-service and discount brokerages, and function similar to a HISA. They’re less known because more people hold an investment account at a brokerage, rather than an ISA. Many brokerages offer an ISA that pays a competitive rate with minimal fees. Just note that it might take a bit longer to withdraw money when you need it, when compared to a savings account. ISA deposits are typically protected through the Canadian Investor Protection Fund ("CIPF").

 

3. Cash exchange-traded funds (“ETFs”)

 

These are securities traded on an exchange like other ETFs. They hold investors’ money in one or more underlying savings accounts at chartered banks or other financial institutions. A benefit of cash ETFs is that they can be held in any account type, including TFSAs and RRSPs, while most other types of savings accounts are typically available only as a non-registered (i.e., taxable) account. Since cash ETFs are traded on an exchange, there’s some added complexity to using them. Depending on market conditions, an investor could lose some return when buying and selling a cash ETF. Also, while it may take a bit longer to access your money since you must sell the investment before making a withdrawal, cash ETFs are still more liquid than products like GICs, which usually make you commit to locking in your money for a certain time period. As with ISAs, cash ETFs are available via full-service and discount brokerage accounts, and are protected through CIPF.

Our savings account is an investment savings account

The savings account offered by CI Direct Investing is an ISA held through our affiliated custodian partner, CI Investment Services Inc.

Unlike other savings accounts offering an introductory rate that expires and defaults to a lower long-term rate, the interest rate we offer does not expire (though it may move higher or lower, based on the market environment). The best part? Our savings account is completely free, and can even help reduce the fees paid on your other investment accounts!

 

Keep in mind that our savings account is in Canadian dollars, is only available for individuals (not for joint account holders or other entities) and is a non-registered (taxable) account type.

Key benefits:

  • No promotional rates.
  • No fees. No catch. No kidding! All transactions are totally free.
  • No minimums. Deposit as much or as little as you like.
  • “Householding” with your other accounts at CI Direct Investing may help qualify for reduced fees – ask us about how it works.

Pretty flexible, huh? As well, CI Investment Services Inc. is a member of the CIPF, which provides protection for your accounts in case of the custodians’ insolvency, up to $1 million per account type. We help keep your money safe, so it’s there when you need it. Withdrawals can be processed within three business days (subject to initial holds on new deposits).

Buy cash ETFs, commission free, at CI Direct Trading

Unlike some other discount brokerages, CI Direct Trading doesn’t limit an investor’s choice when it comes to cash ETFs. DIY investors can choose from any of the cash ETFs available in Canada, and use any available account type. ETFs are free to buy and have a cost to sell. Similar to ISAs, balances are protected under CIPF.

Getting started is easy

Check out the Save page to see more details about the savings account offered by CI Direct Investing, including the current interest rate.

 

Check out the Trade page to learn more about CI Direct Trading’s available account types and pricing.