The difference between a high-interest savings account and a regular savings account

The main difference between a standard savings account and a HISA is the interest rate. As suggested by its name, a HISA pays a slightly higher rate than a standard savings account, allowing savings to grow quicker. It may, however, be subject to withdrawal or transfer limits, transaction fees or minimum balance requirements. A standard savings account is a good place to keep surplus cash you don’t need for everyday transactions (use a chequing or hybrid account for those needs). A HISA, on the other hand, is a better choice for holding savings that are geared toward a particular goal, such as paying for home renovations or university tuition. 

The difference between a HISA and a GIC

GICs and HISAs are safe and secure ways to save money and can be used to earn interest and save money. And both have their place in a financial plan. The main difference between the two financial products is that when you make a deposit into a GIC, you have to leave it there for a certain amount of time or you will pay a penalty. The banks can count on having access to your money for a given period (usually GICs are available for terms of six months to 10 years), so they tend to pay more interest than HISAs. GICs are suitable for medium- to long-term savings. But HISAs are more flexible and are a great place to save money for a short term. You earn a higher interest rate than in a regular savings account, and you can still access the funds if you need them.

How to choose a high-interest savings account

Most financial institutions in Canada offer HISAs, and you will want to consider which is the best fit for your needs. First and foremost, consider the interest rate. Of course you should look for an interest rate that outpaces the rate of inflation—or your money will ultimately be worth less than before. (However, the inflation rate in 2022 rose above the typical 2% target and even went as high as 8% at one point. And HISAs interest rates have yet to keep up.)

You will also want to carefully look at the HISA terms and conditions. Some accounts charge fees on transactions, limit withdrawals and/or enforce lock-in periods, and some may require you to keep a minimum balance, too. 

Take advantage of cash signing bonuses or higher promotional rates if there are any, but also keep in mind that the long-term interest rate is more important than a short-term introductory rate.

How the Bank of Canada’s overnight rate affects high-interest savings accounts

Changes in the prime rate, which are based on the Bank of Canada’s overnight rate, affect the interest earned in HISAs as well as on GICs and other investment vehicles. When the overnight rate increases, individuals can earn higher interest on the aforementioned types of savings, because financial institutions have more flexibility to compete on the interest rates they offer. On the other hand, people who are retired or living off fixed income from a savings fund can be negatively affected when the overnight rate drops.

Is having a savings account necessary?

Even when the economy is strong, the interest rates on savings accounts tend to be low. If you compare this to real estate or stock portfolio returns, you might wonder why you should hold a savings account at all. The thing to understand is that these aren’t comparable products. They’re apples and oranges, each are used for different reasons.

A savings account is an essential part of everyone’s personal finance portfolio. Why? They are a place to keep your money safe—and liquid!—while earning guaranteed returns. Although these returns tend to be modest, they can help your money grow steadily to combat against inflation. Having a savings account is important if you want a safe way to set aside money in case of emergencies or for an upcoming major purchase, like a car or a down payment on a house. Stocks typically do well in the long term, but short-terms fluctuations make them unsuitable places to store money for a purchase in the near future because you may well be forced to sell during a downturn. If you’re lucky enough to own real estate, you already know that it is anything but liquid (and can be tough to sell depending on the real estate market). Savings accounts hit the sweet spot by providing interest, while your money is protected by CDIC or similar deposit insurance coverage, up to specified limits.

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