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 2022 are very different from the savings accounts you would have found decades ago. 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.

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. If you’re wondering what a high interest savings account is and how they differ from a regular savings account, we will be reviewing that information below.

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 generally 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 8% over the past seven years.

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.

Why are high interest savings accounts important?

Now that you know what is a high interest savings account, it’s also critical to understand why it is important to have one in Canada.

If you keep your money in a savings account which offers an interest rate that’s lower than the inflation rate, you’re essentially losing money. With high interest savings account, you’re minimizing your annual losses by keeping your money in an account that offers as high of an interest as possible.

Signing up for a high interest savings account with a digital bank like KOHO will also save you on account fees. These accounts also usually don’t have minimum balance requirements and in addition, offer unlimited transactions.

A HISA with a financial institution that’s a member of the Canada Deposit Insurance Corporation (CDIC) means that you can have peace of mind knowing that up to $100,000 per eligible account deposits are insured.

Now that you know what a high interest savings account is, you know that you can put your cash in the right place. HISAs not only offer high interest rates, but your money is also insured. If you don’t need the cash right now and would like to have an emergency fund or protect your savings from inflation, HISAs are a great option to consider.

Where to find high interest savings accounts

Many of today’s highest-yielding savings accounts can be found at online banks. There are many reasons why online banks have an advantage over their older, more traditional counterparts. Online banks operate with much fewer expenses, allowing them 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. In addition to offering high interest accounts, KOHO 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.

Alternatives 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 not easily convertible to cash, 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 Easy offers 1% cash back on groceries, bills & services, 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.

How to find 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.

Consider the user experience

Now that you know what a high interest savings account is, 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.

Compare financial planning features

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 much more. KOHO also offers a virtual card to make your online shopping experience simpler and more secure.

Compare fees and payment structures

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.

Choose the best rates

Of course, keeping in mind that you are looking for a high interest savings account, the interest rate is probably 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.

Good luck with your high interest savings account

The world of banking is always changing. Trends, technologies, and consumer preferences change over time and many of these changes have been accelerated over the last few years. However, people will still want to use savings accounts, 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 offers viable options for individuals looking for an account with high return, low risk, and numerous consumer-friendly features.

With a better understanding of what is a high interest savings account, where to find them, and how to choose the right high interest savings account for yourself, you can be on your way to saving more money and fighting inflation.

*Interest rates are per year, calculated daily, paid monthly, and can change at any time without notice.