Cash is a wonderful thing. It can rescue family finances in an emergency, act as the ballast of a retirement savings portfolio or be ready to make the down payment on a new house or next year's contribution to a tax-fee savings account. Regrettably, this safest of asset classes will never make you rich if it is parked in a regular savings account at one of the major Canadian banks. The going interest rate on such accounts is currently 0.25% or less. After inflation and taxes, it's a losing proposition.
At one time, money-market funds -- mutual funds that invest in high-quality, short-term government or corporate debt -- offered reasonable returns and were a popular low-risk destination for cash. However, this is no longer the case. Almost all money-market funds have returned less than 1% annualized over the past five years and improved performance will depend on higher interest rates.
Though returns are still low, there are better places to park cash than a regular savings account or a money-market fund. If you plan to spend the cash in the near future, moving it to a different savings account at the same bank you do business with could be an easy way to increase returns.
At CIBC, for example, moving at least $5,000 from a Bonus Savings Account to an eAdvantage Savings Account boosts your return rate from 0.25% to 1.05%. A current promotion adds an extra 0.95% interest on new deposits until March 31, 2015. That's 1.75% in additional return for a few minutes of effort.
A high-interest savings account at a financial institution other than the one you currently use may be the route to better returns for your cash. Shopping the market using several rate-search tools is a smart way to find the best deals.
A recent search for the best interest rate, using three different tools, produced three different results.
As with search results in general, a well-informed decision requires further investigation.
The attractive rates at Luminus Financial and La Capitale Financial Group are limited-time promotional offers which will revert to the regular rates, 0.35-1.75% and 1.35% respectively, in a few weeks.
While interest rates vary slightly, most features of the other three accounts are similar: e-savings, no minimum account size, interest calculated daily and paid monthly. However, there is one major difference.
AcceleRate Financial and Implicity Financial are Manitoba credit unions. Deposits at credit unions and caisses populaires are protected from loss by provincial deposit insurance, in this case the Deposit Guarantee Corp. of Manitoba (DGCM). The private-sector corporation insures unlimited deposits, and maintains a reserve fund to repay deposits if a member credit union fails. However, the Manitoba government has no obligation to support DGCM financially.
Canada Deposit Insurance Corp. insures deposits at banks and federally regulated trust companies such as Vancouver-based Peoples Trust Co. CDIC insurance coverage is limited to $100,000 per depositor, per institution, for non-registered savings. Because CDIC is a federal crown corporation, its financial strength is greater than DGCM. For some investors, this government guarantee trumps a few extra basis points of return.
Moving cash from your brokerage account to a high-interest account at another institution may not be practical. If so, the best place to park cash could be a form of high-interest account available through investment and mutual-fund dealers. These accounts, sometimes called investment savings accounts, are bought and sold like mutual funds. But there are no management-expense ratios, no sales commissions, and CDIC insurance applies. The minimum deposit ranges from zero to $5,000.
Most of these accounts currently pay 1.25% interest, calculated daily and paid monthly. Withdrawals take about one business day to complete. Examples of these accounts are listed below. Note that availability varies by dealer.
Interest rates on these accounts can change at any time. If you crave safety and a guaranteed yield, a cashable GIC could best suit your needs. This type of GIC has a one-year term and is redeemable with no interest penalty after a minimum holding period, usually 30 or 90 days. The applicable federal or provincial deposit insurance protects your money.
It pays to shop the market for a cashable GIC. A search using the aforementioned rate-search tools found the best deals at Oaken Financial: a 1.75% one-year GIC cashable after 30 days and a 2.00% one-year GIC cashable after 90 days. (In addition, Oaken Financial has a 0.25% bonus rate in place until Dec. 19 on its GICs.) These GICs are CDIC-insured. The rates offered at other financial institutions for a similar product ranged from 1.55% down to 0.15%.
If your cash will be needed at a known point in the future, a GIC with a term length that matches your holding period will provide rate certainty and possibly the highest returns. Once again, shopping the market is essential to find the best deal.