Are you looking to diversify your investment portfolio and make your money work for you? Bonds and High Interest Savings Accounts can both help you save and grow your wealth. By understanding how each works, you can make informed decisions about your investing and savings goals. Let's dive in.
What is a Bond and how does it work?
Bonds are a type of fixed-income investment product you can buy from a financial institution or a brokerage. When governments (federal, provincial, or municipal) or companies need to raise funds, they sometimes issue bonds. When you invest in a bond, you essentially lend money to the bond issuer and, in return, that bond issuer promises to pay you periodic interest plus return your principal investment when the agreed-upon bond term reaches maturity.
One of the advantages of investing in bonds is the stability they offer. Bonds are considered relatively safe investments as they are less volatile than other investments, like stocks. In addition, bonds tend to provide reliable, expected returns, allowing you to plan your finances with a degree of certainty. They can serve as a valuable component to hedge against more volatile investments you may pursue, providing stability and reducing risk.
What is HISA and how does it work?
A High Interest Savings Account (or HISA) is a savings account that offers considerably higher interest rates than your standard savings account. HISAs can offer interest rates up to 3%, or even higher. That can be about 10x higher than traditional savings accounts, which often offer just 0.3% interest, or even lower. Due to their higher interest rates, HISAs have become a popular place for Canadians to store their short and medium-term savings.
HISAs work pretty much just like a standard savings account. You can set one up with most banks, credit unions, and online financial services companies (like KOHO, for example). You can add, withdraw, and transfer funds to a HISA, like you would any other bank account. Some HISAs have some limitations or restrictions (like transaction limits or extra fees), so shop around and find one that offers a good rate and will work for your needs.
Pros and cons of Bonds
Bonds offer several advantages to investors. They’re considered secure, low-risk investments that offer steady returns. But there are drawbacks too.
Pros of Bonds
Regular interest income
Investing in a bond means the bond issuer agrees to pay you periodic interest payments. You’ll get your investment back when the bond matures, and in the meantime you’ll know you’re getting regular income from your investment (often at a higher rate than you get from a savings account).
You can sell them
An interesting thing about bonds is you can sell them on – sometimes at a profit. Say you invested in a bond with a 6% interest rate but the current rate for the bond is now 4%. Other investors may want to buy your bond off you for more than you paid for it because they want that higher interest rate. You can sell bonds before their maturity date.
There are different types of bonds, so you can choose what works for you depending on your comfort level. In most cases, the higher the creditworthiness of your bond, the lower the yield. The trade-off here is security versus opportunity. Government (federal and provincial) are safe but may offer lower returns. Corporate bonds often offer higher rates than government. The riskier the company offering the bond, the higher the yield (but also a higher risk of default). You can also package bonds into EFTs (Exchange Traded Funds), where multiple bonds are bundled together as a single investment product.
Cons of Bonds
Some risk involved
Bonds are not without risk. They come with different levels of creditworthiness. Government bonds, for example, carry very little risk. The same goes for larger companies. With lower-quality bonds from less secure companies, however, there remains a risk the company could default on the bonds and you could lose your investment. These are sometimes called junk bonds. Talk to your bank or broker about your bonds’ creditworthiness.
Limited access to funds
Bonds are generally considered longer-term investments. So, while the trade-off is a pretty secure investment with regular interest income, bonds are generally locked in for a set period, until they reach maturity. If you need regular access to your savings, a HISA could be a better option (even if the returns are a little bit lower).
Pros and cons of HISA
High-interest savings accounts come with several benefits and are a great choice for your short and medium-term savings goals. But no financial tool is without its potential drawbacks.
Pros of a HISA
Earn higher interest
With your savings in a HISA, you will grow your savings more quickly than you would if you were trying to save with a standard savings account. With a HISA’s higher interest rates, your money works harder for you, helping you meet your financial goals faster.
A HISA can provide peace of mind. You’ll know you have your money in a safe spot, accruing interest, and you’ll have access to it when you need it. With a savings pot set aside you can breathe easy, knowing that if something were to go wrong, you’d have the funds to cover it.
Opening a HISA is easy and fast (you just need to prove you’re a Canadian resident, have a Social Insurance Number, and be the age of majority where you live). Through a banking app, a website, and even at an ATM, your funds can be accessed quickly and easily.
HISAs are protected with federal or provincial insurance coverage up to $100,000 – either federally by the CDIC (Canadian Deposit Insurance Corporation) or by provincial deposit insurers.
Cons of a HISA
Minimum funds requirements
Some High Interest Savings Accounts only let you open the account if you start off by depositing a certain amount of money. And may also require you to hold a minimum balance at all times. Not all HISAs do this though. Check with your bank or credit union what’s required before you commit to an account.
Some HISAs also impose restrictions on the number of deposits, withdrawals, and funds transfers you can make. Some others may charge you per transaction – sometimes up to $5 per transaction. Shop around for the HISA that fits your saving behaviour.
How to choose between the two
When deciding between bonds and HISAs, it's important to consider your individual financial circumstances and goals. Evaluate whether you prioritize higher returns for longer-term savings (with bonds) or accessibility for short to mid-term savings goals (with HISAs).
The choice might ultimately come down to when you need your money. Generally, savings accounts (even HISAs) will have lower interest rates than what you might get from a bond. So, while you might earn more investing in bonds, savings accounts are more flexible and your funds are always just a few clicks away.
An option is certainly to have both. Some money in bonds earning a little more, with regular interest income. And some in a HISA, easily accessible, and with the ability to continually add to it as you save. You have options! Do your research and talk to professionals to help you decide where you want to keep your money.
Managing your finances effectively is a key component of building a stable financial future. Bonds and HISAs are just two options available to you. But there are lots of choices out there.
With KOHO, learn about different ways to manage your money and grow your wealth, through our catalog of helpful blogs. And if you’re interested in HISAs, check out the great KOHO option, where you can earn up to 4.5% interest.
Sam Boyer spends, invests, budgets, and writes. He enjoys writing about things he wishes he’d learned earlier — like spending, investing, and budgeting. A journalist originally from New Zealand, Sam has written extensively about consumer affairs, insurance, travel, health, and crime.