Exploring high-interest savings accounts

In Canada, a high-interest savings account is a type of bank account that offers a higher interest rate than a standard chequing or savings account. These types of accounts are often recommended for short-term or medium-term savings goals, like if you wanted to build a substantial emergency fund, save for a car or home renovation or even save toward a downpayment for a home.

People who do not want their money tied up for a fixed term (with a set start and end date to access their money) often prefer high-interest savings accounts over guaranteed investment certificates. Those who want to enjoy the tax advantage offered for their savings will want to look into a high-interest savings account that is held inside a TFSA or RRSP.

Money growth tips 

It can be overwhelming to figure out where to start when planning, particularly if retirement or other long-term savings goals are decades away. With compound interest, the earlier you get started, the more you can grow your finances over a longer period.

Compound interest examples for beginners 

To understand the advantage of time, Canada Life provides an educational example (for illustrative purposes only) of $240,000, saved two different ways, to show how critical it is to start saving young, even if it is less money: “If you save $500 per month with an annual return rate of six per cent compounded monthly, beginning at age 25, you’d have $1,000,724 saved at age 65. Now, if you tried to catch up on your savings, contributing $1,000 with the same annual rate of return beginning at age 45, you would only have $464,361 at age 65.”

When your money has twice as much time to grow, you can end up with more than twice as much. In any instance, Canada Life reminds us that past investment performance is not a guarantee of future performance. They also note that various investments have fees that may impact your earnings.

Estimating growth with the rule of 72

The rule of 72 dates to a math book from 1494 and is a simple and popular formula that can be used to calculate the time required for an investment to double in value with compound interest. This rule is taught to new investors because it is easy to calculate and understand.

According to Investopedia, to use the rule of 72, “You take the number 72 and divide it by the investment’s projected annual return [interest rate]. The result is the number of years, approximately, it’ll take for your money to double.” To demonstrate, they provide the example of an eight per cent annual compounded rate of return. Following the method, 72 divided by eight is nine – it will take roughly nine years to double the invested money. So, “If it takes nine years to double a $1,000 investment, then the investment will grow to $2,000 in year nine, $4,000 in year 18, $8,000 in year 27, and so on.”