How savers can find the best interest rates

By Les Whittington | Mon Jan 3 2011

Dan Demers of TD Canada Trust. “You don’t have to put away large amounts of money. Just a little bit at a time . . . makes a big difference in the long run.”

Everyone says we should be saving more money. But what’s the point?

You don’t need a calculator to figure out that, with inflation in Ontario at 3.4 per cent and banks at best offering 2 per cent interest, your nest egg could actually be shrinking.

So what’s a saver to do? Is there a way to rebalance the scale so you can build wealth rather watch it bleed away?

It’s doable, experts say. But it takes a strategy, discipline and a determination to make your money work for you.

Make it a priority to take advantage of tax breaks provided by vehicles as RRSPs and Tax-Free Savings Accounts. Shop around for the best savings rates and special accounts that help you accomplish your goals.

Above all, escape the downward debt spiral. That means using your cash to pay off your credit cards and paying down your mortgage and other loans.

Once you’ve done that, you should consider other investments — such as home renovations, GICs or stocks.

The savings habit: Building wealth is not just for big-time investors. Anyone can take advantage of the system if they remember that pennies grow into much bigger denominations over time.

“People need to think: A little bit at a time works really well,” says Dan Demers, an associate vice president at TD Canada Trust in Toronto.

“You don’t have to put away large amounts of money. Just a little bit at a time and it makes a big difference in the long run.

“If you talk with anyone of a high net worth, they’ve always had a way of saving every payday, every week, and they put it away” and let it build over time, Demers observed.

Bulking Up: The days when consumers were stuck with low-interest savings accounts (see story on this page) are gone. Innovative savings accounts, new players on the financial scene and technology improvements provide a better chance to make money through savings and investment.

While the banks’ everyday savings vehicles pay little in the way of interest, a wide range of competitors — many of them Internet-based — have emerged to offer a better return.

Check out the options at thestar.com’s tables on savings, investment and consumer rates at Fiscal Agents..

The data shows that the annual interest rates for savings accounts ranges, for example, from 0.25 per cent paid by some large banks and insurance companies to 1.5 per cent paid by ING Bank of Canada to 2.0 per cent from Canadian Direct Financial to 2.2 per cent paid by AcceleRate Financial.

Most of the institutions offering high-interest accounts are covered by federal or provincial deposit insurance, but it’s a good idea to go to their websites to check out their insurance coverage and transaction charges.

Shop around: That’s the message from John De Goey, a financial planner with Burgeonvest Bick Securities Ltd. in Toronto.

Interest rates on basic bank accounts are modest, he says, “so if you’ve got some cash that you’re sitting on, that you wish to retain for a rainy day or because you wish to build it up to buy a car or a house or a condo in the next one or two years, then by all means you should open an account at ING or Ally.”

The interest-rate difference — say, an additional 1 per cent or 1.25 per cent — is worth it, De Goey said.

“If it’s 1.25 per cent on $40,000, that’s $500 after a year and that’s worth crossing the street to open an account for. It takes you half an hour, but when else do you get paid $500 for a half-hour’s work?”

Beyond finding better interest rates, savings-minded consumers can take advantage of banking services that make the job of putting aside cash automatic.

Several banks offer an option that allows you to have a certain amount of money transferred to a separate savings account each time you make a debit card purchase.

Scotiabank’s “Bank the Rest” saving program, for instance, allows you to automatically round up every purchase made with a Scotiabank debit card to the next multiple of either $1 or $5 (you choose the amount). The difference between the actual cost of the purchase and the rounded-up amount goes to a savings accountA consumer can easily add several hundred dollars a year to their savings with this innovation, the bank calculates.

Another option is a pre-authorized transfer of a set amount on a regular basis from one of your bank accounts to a separate savings account.

“The real trick is, if you are going to set up a transfer, make sure it’s on your pay day, so the transfers actually occur,” says TD’s Demers. “And put it into an account that you can’t access, you don’t see as much, and it’s not on your mobile phone and it’s not on your bank card access—so it’s tucked away a little bit.” That makes it easier not to spend the money you’re setting aside, he explained.

“If you do $25 a week, it puts you in a position of having $1,300 by the end of the year,” says Demers. And based on some polls and surveys we’ve done at TD recently, $1,300 can actually help you towards a small vacation,” Demers said. “Or it can go a long, long way, if not above and beyond, what you would have as expenses and gifts around the holidays. Or it may go a long way to putting money aside for an RSP, RESP or similar investment, he said.

A detailed rundown in different types of savings and chequing accounts and information on which accounts work best for an individual consumer have been made available by the Financial Consumer Agency of Canada.

Power tools: The most important investment for any Canadian financial consumer is probably opening a Registered Retirement Savings Plan, commonly known as an RRSP. The savings in an RRSP accumulate on a tax-free basis. In most cases, the funds are withdrawn during retirement, when the RRSP holder’s tax bracket is much lower. And the annual contributions are tax deductible, which can greatly reduce a person’s income tax bill.

If you are first-time homebuyer, you are allowed to withdraw up to $25,000 from an RRSP to help pay for your new home under the federal Home Buyers’ Plan.

Under the federal Lifelong Learning Plan, you can withdraw $10,000 a year (to a total of $20,000) from your RRSP to pay for your own or your spouse’s ongoing education.

The Registered Education Savings Plan lets a parent contribute up to $50,000 for eventual payments for a child’s post-secondary education. Investments within the RESP accumulate tax-free and, when withdrawn, are taxed at the student’s low income tax rate.

Unlike with RRSPs, the contributions are not tax deductible, but the education savings plan has another enticement: it offers just about the only “free” federal money available to all Canadians. Ottawa pays 20 per cent of the contribution to an RESP up to $500 annually. Low-income Canadians are eligible for larger grants.

Canadian residents who are at least 18 years old can deposit up to $5,000 annually in a Tax-Free Savings Account, Both the contributions and the investment earnings within this registered account can be withdrawn without any income tax owing. It’s a highly flexible financial instrument (unused contribution room accumulates from one year to the next) that can be very valuable in helping consumers achieve short-term and long-term savings goals. For instance, TD Bank estimates that a person contributing $5,000 a year to a TFSA over 20 years could wind up with $18,500 more than he or she would have by putting the same money into a regular account.

“When I think of my own investments, the first thing I will do is maximize those three,” TD’s Demers said of the RSP, RESP and TFSA. “That puts me in a situation where I am maximizing my effective return on investment after tax.”

Reduce debt: Those who aren’t taking advantage of the three programs discussed above are shortchanging themselves, experts say. But there is an even more basic wake-up call that every consumer needs to heed before he or she can hope to build wealth. That’s the crippling impact of debt on your financial well-being.

Advisors distinguish between two kinds of debt. On one hand, there’s worthwhile debt that helps you build equity, such as a mortgage, or improves your tax position, such as a loan to purchase an RRSP. On the other hand, there’s bad debt such as overdue payments on a credit card.

If you want to see how credit card debt — if not paid off in full each month — can eat into your finances, have a look at the free debt calculator at Credit Canada, the Toronto-based charitable organization that helps consumers with debt payments and financial management.

Financial advisers generally urge consumers with large outstanding credit card debts to attempt to consolidate the debts and pay them off using a loan with a lower interest rate.

For instance, the annual interest on a line of credit may be as low as 3 per cent compared to 18 per cent on a credit card — a difference that can save you hundreds, if not thousands, of dollars a year in debt payments. In general, using available cash to lower your mortgage or other debts will pay dividends and should be considered a high priority strategy, experts say.

Invest: If you have cash left over once you have paid down debt and taken maximum advantage of registered savings plans, you may turn your attention to investments.

It’s an especially good idea at this point to discuss your options with a qualified financial adviser. Decisions should take into account a wide range of factors, including your financial worth, your lifestyle needs, age, risk tolerance, long-term goals and financial market conditions.

The most obvious long-term investment for most people is buying a house or condo. Extensive information on mortgages, affordability and what to look for in mortgage hunting is available at the Financial Consumer Agency of Canadawebsite.

Those who already own a home may invest in renovations or other improvements — such as a new kitchen or bathroom — or upgrades to conserve energy. such as a new, high-efficiency furnace, better windows or improved insulation.

“Generally speaking, especially for bathrooms and kitchens, upgrades to a house pay for themselves,” says De Goey of Burgeonvest. And, with energy improvements, you can spend money to save money, he added. But, while you are building equity with these renovations, you should keep in mind that you generally won’t cash in until you sell the dwelling, De Goey said.

Stocks, mutual funds and bonds are likely the next option. Here it’s imperative to have a thorough analysis of an investor’s needs versus his or her appetite for risk.

For those who want to keep risk to a minimum, there are, for instance, various Guaranteed Investment Certificates (GICs) available at different interest rates, different maturity dates and different conditions for redemption.

A GIC usually ties up an investor’s money for several years and the trade-off for security is a limited payoff because of relatively low interest rates. However, it’s important to shop around because redeemable and high-interest GICs are available. Current interest rates for a five-year GIC range from 2.1 per cent to 3.5 per cent.

But given the rate of inflation and taxes, an investor is likely to come out behind on GICs, says Ranjit Dhaliwal, a financial advisor and president of Clarity Financial in Brampton.

“Having money in GICs, you’re actually losing it,” he said.

Investing in the stock market still offers the possibility of lucrative returns. But it’s for sophisticated investors who are not faint of heart, as two market collapses in the past decade have dramatically shown.

“It is always risky,” Dhaliwal said, adding that one attractive option in current market conditions is buying dividend-paying blue chip stocks.

Many of these stocks are concentrated in the financial, transport and energy sectors and, in general, dividend yields in Canada have increased in the past decade.

“You have some people saying that, for the next 10 years, we might see another flat market, so you should only be investing into dividend-paying stocks,” remarked Dhaliwal.

“At least you’re getting paid to wait.”

Saving:

• How to save when rates are low
• Saving: 10 things to know
• Calculator: Saving for a goal
• Calculator: GIC rate of return
• Automatic plans make saving easier

Extensive information on investing choices, risk and returns is available at the Ontario Securities Commission-funded website, www.getsmarteraboutmoney.ca.