Yesterday I read a post about the benefits of a high interest savings account. I'd like to thank @sej for the work she did making the post.
Here is the link : @sej/adulthood-and-finances
Great job and covered all the points. Still, I have taught my nephew and sons about the benefits of a high interest savings account so I'm going to tell a little different story.
Why you need a high interest account
Now again @sej gave a comprehensive list of the benefits of the account she opened.
- Maximize Savings
- Beat Inflation
- Compound interest
- Passive income
- Financial stability
- Easy online banking
- No Fees
- and Easy access.
Awesome. Except it sounds a lot like an advertisement from the bank. I also know what happens when I mention stuff like that to my sons. Their eyes glaze over and they get bored really quickly! As for my nephew who hates dealing with finances, well, his eyes glaze over even faster.
The story of car insurance
Now my nephew and my sons all pay car insurance and it is not a small bill. It can easily be $3,000 per year. They all know it and they all dread it. Still it is only $276/month. When they go to pay they are always asked **"Pay at once or pay monthly". The answer for all of them was the same. Of course we pay monthly.
OUCH
Here is the thing. $276/month is actually $3,315 per year. Why? There is a $75 financing fee and there is 8% interest. The insurance company is hitting with extra fees but because people don't tend to have a few thousand lying around they just take it. UGH
But what if you actually put the money away in advance? For one year BEFORE buying the vehicle you get in the habit of paying that $276 a month into a high interest savings account? By the end of the year you would know that you could afford the payment. You would have $3,315 in the bank AND all the interest it made. At 4.5% that could be as much as $3,450.
Now when asked how do you want to pay? Pay in full, the money is already there PLUS there is $450 in the account to enjoy! Same insurance, same car, the difference is a little planning, a high interest account, and some patience!
That is the embodiment of "Maximize Savings" and "Financial Stability".
If I won the lottery
Now a different day I was walking with my son and he asked "What should I do if I won the lottery". I told him, plan carefully but at first put $120,000 into different High Interest Savings Accounts. At this time those would be Neo Financial, Wealthsimple, EQ Bank, and Canadian Tire Bank. He gave me a bit of a blank stare. "I'm not investing???". I told him, "of course you are...but while there are great investments out there don't rush into any of them". However, while you are looking might as well make some interest.
Here's the thought. Each of those accounts above pays 4-4.5% interest. Get the money out any time and get interest from the first day. Plus your deposits are insured for $120,000 so even the bank goes bankrupt all your money is safe. However, with those four banks that is almost $500,000 deposited making 4.5%. Every month you can take out almost $2,000 and never actually touch your initial investment.
Then I told him. "You could go to the Philippines and live quite happily on the P80,000 interest....and even a decade later you would still have a half million in the bank".
That was actually quite exciting to him. The thought of having a never ending bank card as long as he didn't go nuts? Just going to the ATM every month or going shopping every month and not have to work?
That's the definition of "Easy Access" and "Passive Income" as well as "Financial Stability" and the CDIC insurance? Well, that's just a nice security blanket.
Beats inflation
Now this is a tough one. When I went to the Philippines back in 1996 I bought something for P800. When I asked @sej what it cost these days she told me about P8000. That's a 10x increase in not quite 30 years.
If I had placed my money in a traditional savings account paying less than 1% interest my P800 would be worth much much less these days. Sure I have when I initially put in, but it just doesn't buy nearly as much now!
That's why getting interest is important. Now if I look at 4.5% interest and use the rule of 72 that means that my money would double roughly every 16 years. If I put in P800 back in 1996 it would double to P1600 in the first 16 years then up to P3200 after another 16 years. My money would roughly go from P800 to P3200 if I didn't touch it. Doesn't quite keep up with inflation but its a whole lot better than being stuck with my initial investment! Now I happen to know that interest rates did go much higher (The Rural Bank of Makati was giving me 14% for 5 years or so). In that way it is actually quite possible that with a high interest savings account my initial P800 would be P8000 now. Maybe I didn't gain any purchasing power but at least it wasn't eroded away over time!
Ease of Use
But not all High interest savings accounts are created equal. The Canadian Tire HISA works but its not very flexible. The Neo account is great at almost everything but it doesn't allow me to pay American Express credit card. The EQ bank account is great but only gives 0.5% cashback when I use the debit card to spend. The Wealthsimple account is great and gives a full 1% cashback on everything I buy but it doesn't allow bill payments.
In the end they are bank accounts and they need to fit each individuals needs. A little research goes a long way. In the end though, I'd far rather take a no fee account that gives me interest than pay $35.95 (Scotiabank) for a chequing account that gives me no interest.
So, in response to @sej .... Good job on making a wise adulting decision. You covered all the bases and I appreciate the initiative you took in writing on the #earn spend give community. I really look forward to seeing you write more in the future! I just thought I'd give a little different viewpoint of the same topic 😀👍
Thanks for reading, have a great day, and as always, I love comments