If you’re looking for somewhere to store your emergency funds, vacation savings, or a down payment on a new house, a high interest savings account offers a safe place to earn while you save.
What is a high interest savings account (HISA)?
A high interest savings account, also referred to as a high yield savings account, is a bank account that offers a higher interest rate than a traditional savings account. It’s a great low-risk option to save for any short-term goal.
How does a high interest savings account work?
A HISA works like a traditional savings account except that you can earn more on your savings in a shorter amount of time, thanks to a higher interest rate. How much interest you earn can vary based on several factors, including where you save, how long you save, and how much money you hold in your account.
Like a traditional savings account, you can perform regular banking transactions with a HISA, including deposits, bill payments, transfers, and withdrawals. Unlike a traditional savings account, many HISAs don’t come with cheques or a debit card since the account isn’t designed for daily spending.
Pros and cons of a high interest savings account
Like other financial products, a high interest savings account comes with a mix of pros and cons.
Pros:
● Interest rate. You’ll earn a higher interest rate in a HISA than with a traditional savings account.
● Low risk. If the stock market plunges, there’s no risk that you will lose any money. Many accounts are insured by the Canada Deposit Insurance Corporation (CDIC), offering deposit protection up to $100,000.
● Easy to access. Compared to invested funds, your money is easier to access in a HISA.
● Inflation protection. Saving in a HISA can help you maintain your purchasing power by keeping up with the inflation rate more than having your money in a regular savings or chequing account.
Cons:
● Opportunity cost. When you put your money in a HISA, it means you’re not investing it somewhere else. If you invest your money in the stock market, there’s a chance you will earn a higher rate of return. However, there’s also a chance that you will lose on your investments.
● Fees. Some financial institutions might charge fees such as monthly maintenance fees, as well as withdrawal or transfer fees. Savings accounts are meant for saving, so fees for transactions such as Interac e-Transfers, debit purchases, bill payments and withdrawals will apply. To avoid these fees, transactions should be done through your chequing account.
● Taxes. You are taxed on any income you generate through interest.
How to use a high interest savings account
A HISA is a flexible and convenient way to save money while you earn. People may use a high interest savings account for:
● An emergency funds
● A down payment for a home
● Home renovations
● Vehicle repairs
● A vacation funds
● Wedding expenses
Who should have a high interest savings account?
A high interest savings account is a safe and versatile option to store your short-term savings. As long as you meet the minimum age and residency requirements, a HISA can be a great way to grow your savings over time. If you need to access your money for day-to-day spending, you may be better off opening a chequing account.
The Bottom Line
As the cost of living continues to rise, you want to protect your purchasing power by earning as much as possible in your savings. But it can be challenging to decide what to do with your money. Investing your savings provides the potential for greater reward but comes with higher risk. A HISA delivers a balanced approach offering a modest return and a very low level of risk.
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