I spend a bunch of time thinking and reading about personal finance and investing. One of the things that recently crossed my mind are options available to savers regarding short-term savings. Depending upon your financial goals, there are a number of products that can help you with your short-term savings. Other products on the other hand don’t warrant any attention, at least from us. For today’s post here are the options we gravitate to; why we prefer these short-term savings options and the reasons we avoid others.
Option # 1 – Chequing account
We use our chequing account for everyday expenses and above a certain threshold, we move any money saved to a savings account.
- Low risk
- We keep as much money in the chequing account as we want
- Easy access, get money out whenever we wish
- Helps with our weekly budgeting process
- Pays a crappy interest-rate
Option # 2 – Savings account / high-interest savings account
Beyond funds in our chequing account we move any money saved to a savings account. We don’t distinguish between a “savings account” and a “high-interest savings account” here, the latter is an oxymoron with today’s interest rates I think.
- Low risk
- Pays a slightly higher interest-rate
- We keep as much money in the savings account as we want; good for emergency funds
- Still pays a low interest-rate; bad for long-term investing.
As you can see above our savings plan is pretty simple but we like it that way. Basically everything beyond a chequing and savings account is invested for the long-term (10+ years) across various accounts.
We don’t invest in Guaranteed Investment Certificates (GICs). These securities can lock our money up for 6 months (or more), the interest rate on these products is low now, and we would need to pay a penalty to get at the funds – that doesn’t work for us.
We’ve never invested in Canada Savings Bonds. These bonds pay an interest rate similar to GICs.
Money market mutual funds also don’t have any home in our portfolio. Same goes for government bonds and corporate bonds although I used to invest in bond ETFs at one point. I suppose if we were closer to retirement age we would have more fixed-income across our portfolio but certainly not now during our prime asset accumulation years.
What short-term savings options work for you?
I try to keep a $2,000 float in my chequing account to avoid those pesky $45 NSF charges. I have some money stashed away in my TFSA. Once my mortgage is paid off, the plan is to start putting my TFSA to good use.
Sounds like a great plan Sean. You certainly are financially focused!
For anything super short term, we usually keep our savings in our ING high interest savings account,which gets pathetic interest still but it’s better than our chequing account and we have easy access to it.
Seems like a good plan!
I do something pretty similar with cash in my chequing account to cover about 2 or so months worth of expenses and I hold some cash in an easily accessible savings account as well. Everything in my brokerage portfolio is for long-term savings/income building. Like you said, I wouldn’t use GIC’s/Bonds since they are not readily accessible without incurring fees which would probably wipe out all their gains.
Sounds like a good plan…and when it comes to GICs and bonds nowadays, they are getting hammered and will even more so when rates will rise Wisp. Thanks for checking in.
I tend to keep all my cash in my chequing account too. I basically only dip into it just to zero my credit card balance at the end of every month. I guess the only reason why i do that is for the reward points my credit card offers.
As of right now most of liquid assets are already invested, but as im building up my assets I think i will hold some cash (~15k) in my RRSP so if there are any opportunity i won’t miss out. As far as the TFSA goes i think i’ll continue to keep all of the funds inside fully invested.
I need to hold some more cash inside the RRSP, I would like to have some money on hand when the market tanks or corrects….good call Ace. I simply don’t have very much money right now. Need to work on saving more, lots of spending this fall.
We do pretty much the same thing but about 6 years ago we skipped the whole “savings” account step when the interest rates sunk to ridiculously low levels. It just didn’t seem to be worth the hassle (admittedly, a small hassle) to have 2 accounts for such a paltry return, so we now have a zero-fee chequing account with a ~$5000 float to cover monthly in/out expenses. The rest gets socked away!
Seems like a very simple and smart way to go Peter. Does that “float” include your emergency fund as well?
We don’t really have an emergency fund ready to go. In the unfortunate event of a temporary setback and/or one of us loses our job, we do have an LOC to draw from if necessary. I figure such an event has a >10% probability, so why keep too much extra money on hand if we could be putting it to work in other ways.
I know a number of people that rely on a LOC for their emergency fund, not a bad way to go but I know we sleep better at night with some small cash in the bank. We’d like more eventually but we’re simply not there yet.
And don’t forget these interest gains are taxable at your marginal tax rate. Brutal.
One option is open a savings account for your kid. They usually pay 0.5% more than other equivalent products and it acts no differently than your own savings account. Sure you still personally get taxed in the gains but ‘death & taxes’ right?
Death and taxes indeed. Yeah, we don’t keep very much in savings because I’d rather not pay any taxes on savings, tax on interest is like employment income, so better off tax-free or tax-deferring when at all possible of course. Thanks for the comment None.
We use a no-fee (also no interest) chequing account for day to day stuff and consolidation of our various income sources and pre-authorized payments. We use a high(er) interest account (Hubert) for very short term cash requirements (usually around 10K). We also use one-three year GICs (Hubert again) for when we know we will be needing some cash (10-30K) for stuff like vehicles or renovations. There is also 50-100K cash sitting in various investment accounts (RRSPs, TFSAs, and direct investing) to take advantage of any good investment opportunities that might come along. We are at the point that we don’t need to take a lot of risk to chase growth.
Impressive Lloyd, “50-100K cash sitting in various investment accounts (RRSPs, TFSAs, and direct investing) to take advantage of any good investment opportunities” We have far less than that in cash in investment accounts, we’re almost always fully invested. Not sure if that is a good thing or not.
Nice Post. Thanks for sharing information about Short-Term Savings. We are the experts!
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We do the same as you. We have couple chequing accounts with 2 banks so we can do the usual transactions. The other cash accounts are all high savings account. We’ve purchased GIC’s here and there but at current low interest rates, it makes no sense to buy GIC’s and have your real purchasing power decreasing.
Yeah, we’re really trying to simplify our accounts…chequing for short-term and weekly expenses, savings for medium-term stuff and emergency fund and then everything else invested for dividend growth and distribution income.
Any no-risk savings product will always lose out to inflation, so I try to keep a minimum amount in the savings account. The slight difference in interest rates between banks combined with the low balance means that it doesn’t matter which bank you open your savings account with. Like you, anything above the minimum goes to long term investments.
Yeah, this is why I think some cash is great, but anything long-term, >5 or certainly >10 years should be in equities.
Theres not many options there. We face the same problem and keep bare minimums in our chequing accounts and some of our emergency funds in the savings accounts.
In the past, Ive used bond funds for my emergency funds & short term savings. But now that we are at rock bottom, any rise in interest rate might trigger a hit on that. So, Ive pulled some of it out for now and moved to cash accounts.
We think alike… When interest rates rise…at some point…decades from now? I suspect those clinging to bonds that are not linked to long-term investing portfolios will be disappointed.