What are high interest savings accounts?

A savings account has traditionally been one of the most popular vehicles for building wealth over time. However, the savings accounts you’ll find in 2021 are very different from the savings accounts you would have found in decades past. That’s because the average yield from savings accounts has been steadily declining over time.

In Canada, average deposit interest rates reached an all-time low in October 2020, dropping just below zero for the first time. Though interest rates have increased slightly since then, they are still just above zero and nowhere near the nation’s all-time high of 22% reached in August 1981.

Because the average savings account yield is low right now, many Canadians have been avoiding savings accounts altogether. After all, if the interest being offered is next to or below zero, there isn’t much of an incentive to deposit.

However, while average rates have reduced significantly, there are still some new savings accounts that might be worth exploring. High interest savings accounts offer a viable option for individuals looking to store their wealth and enjoy modest growth over time.

Here, we will discuss some of the most important things to know about high interest savings accounts. By taking the time to learn about these accounts —you can decide if using them makes sense for you.

So what is a high interest savings account?

While there is no formal cut-off for what makes something high interest (high yield), a high interest savings account is generally considered that pays ten to twenty times the national average. So, if the national average is 0.04% APY (Annual Percentage Yield or the real rate of return for a savings account), a high yield account produces a 0.40% to 0.80% APY.

The most obvious benefit of choosing a high interest savings account is that you will get a stronger return over time. To start, you might want to grow your wealth at least at the rate of inflation. In Canada, the inflation rate has hovered between -0.5% and 3% over the past five years. Compared to many other countries around the world, inflation in Canada is low, making it easier to maintain the value of your savings.

To determine the true yield of a given savings account, you should review all the benefits being offered, not just the APY. Accounts that offer cash back, for example, make it possible to effectively reduce the cost of everything you are buying. Little things like cash back and monthly returns can significantly add up over time.

When all else is equal, everyone would choose a high interest savings account over one that has lower interest rates. However, rarely are two savings accounts the same. Most large, traditional banks do not offer high interest savings accounts. This means you might have to look elsewhere to find the account that is right for you; we’re partial to KOHO, which earns you 1.2% interest or 30x what the big banks offer.

"While there is no formal cut-off for what makes something high interest (high yield), a high interest savings account is generally considered that pays ten to twenty times the national average."

Where to find high interest savings accounts

Many of today’s highest-yielding savings accounts can be found at online banks. There are quite a few reasons why online banks have an advantage over their older, more institutional counterparts. These banks often operate with much fewer expenses; limited staff, lack of physical locations, and other minimized expenses help make it easier for online banks to continually pay their customers more.

Online banks are required, by law, to disclose the rates they offer with each account. Most online banking options offer continuous customer support, making it easier to have your questions answered. KOHO is not a bank, but not only offers a high interest account but also offers tools for building your credit over time. KOHO partners with the People’s Trust Company for storing funds, which is regulated by the federal government.

High interest savings accounts can also sometimes be found at a credit union. Credit unions are owned by the members, rather than shareholders. As a result, many of their users feel like they’re treated as more of a priority. The interest rates offered by credit unions in Canada vary, so you will want to compare multiple options before making a final decision.

Alternative to high interest savings accounts

High interest savings accounts offer a stronger rate of return than traditional accounts, which is why many people decide to migrate their savings every year. However, though high interest accounts are better than traditional savings accounts, the total returns offered by these accounts are still fairly low. For most people, there are safe investment options available that can produce similar or higher yields.

• Certificates of Deposit (CD) - A CD offers a higher future return that is guaranteed by the bank. However, these certificates are illiquid, and you may need to wait several years before getting your money back (or pay a fee to cash it out sooner).

• Bonds - Like CDs, bonds offer future returns that are guaranteed, either by the government or by the entity issuing the bond. Be sure to check the bond rating before making any commitments.

• Index Funds - Investing in a speculative market is riskier than investing in a savings account, but even still, the stock market has historically yielded an annual return of about nine percent. Investing in an index fund is a great way to immediately diversify your position.

• Annuities - An annuity is a great tool for retirement saving. Annuities offer future annual payments in exchange for a fixed payment(s) in the status quo.

• Cash back accounts - Opening an account that offers cash back can help you effectively earn continual returns every time you spend. KOHO’s standard free reloadable prepaid Visa account offers 0.5% cash back on all purchases, while KOHO Premium offers 2% percent back on transportation, groceries, and restaurants for $9/month.

These savings vehicles are not mutually exclusive. It is perfectly reasonable, even recommended, to put some money in both a high interest savings account as well as other investment vehicles.

Finding the right high interest savings account

Ultimately, responsible financial planning is all about finding ways to improve your rate of return while minimizing costs. Using inflation as a benchmark is useful because if the yield offered by the account you are using doesn’t match inflation, you will be effectively losing wealth as time goes on.

There are many things you will want to consider when comparing different savings accounts. The user experience offered by the bank, especially if it is an online bank, is naturally something you’ll want to keep in mind. Be sure to choose a bank that has an easy-to-use website, a mobile-friendly app, and also clearly explains each of the products and accounts they currently offer.

You’ll also probably want to find an account that offers useful financial planning features. KOHO’s key features include automated savings, real-time notifications that help you monitor your spending, access to financial coaching, and more. KOHO also offers a virtual card to make your online shopping experience simpler and more secure.

Additionally, it’ll be necessary to compare the various fees and payment structures that come with each of your available options. Fees are one of the most common causes of surprise for new bankers. Fortunately, KOHO offers no hidden fees, meaning no monthly account fees, no NSF fees, no e-Transfer fees, and no interest charges.

Of course, keeping in mind that you are looking for a high interest savings account, the interest rate is probably what remains the most important variable you’ll want to consider. Directly comparing interest rates, cash back, and other payouts will help you quantify the total benefit of choosing to use a given account.

The world of banking is always changing. Trends, technologies, and consumer preferences experience multiple changes each year and many of these changes have been particularly accelerated over the last year. People will still want to use savings accounts though because they are a useful way for storing wealth and avoiding the need to expand your debt.

With the rise of online and mobile banking solutions, many Canadians are looking for alternatives to their traditional, high-cost, and low-yield bank. KOHO, which again, is not a bank, offers viable options for individuals looking for an account with high return, low risk, and numerous consumer-friendly features.