A savings account is a type of bank account designed to help individuals save money and earn interest while also providing easy access to their funds.
People primarily use savings accounts to do just that – save. They are a great way to store money securely while earning some interest, rather than for everyday spending. Most people use savings accounts to save for short-term goals, rainy-day funds, or future expenses.
Savings accounts typically offer lower interest rates compared to other types of investments, like stocks or bonds. Savings accounts are comparatively low risk and low return.
You can open a savings account with all major banks, online banks, and most credit unions. Here's everything you need to know about savings accounts.
Key Takeaways
- Savings accounts are a safe place to store your extra cash and earn a bit of interest.
- Most savings accounts don't have monthly fees, but they may charge fees for transactions.
- Interest rates are usually calculated on the daily closing amount and paid out monthly.
- Some interest rates may change depending on your balance, how much you deposit in a month, or how often you withdraw money.
What is interest on a savings account and how does it work?
Savings account interest rates are expressed as an annual percentage rate (APR). They're calculated daily and applied monthly to your balance.
So if the interest rate is 5%, you're actually earning 0.014% interest every day on your closing balance, which is paid out in a monthly sum.
All interest earned in a savings account is taxed, unless you have a special registered savings account that allows for tax deferral (like with an RRSP) or sheltering (like with a TFSA).
To calculate the interest you can expect to earn with a savings account, use the formula:
Interest = Principal x Rate x Time
Where:
- Principal is the amount of money in your account
- Rate is the rate of interest you’ll earn on your balance
- Time is the number of time periods (each time period is usually one year)
Let’s assume you have a RBC High Interest eSavings account account with a $10,000 balance that earns 0.65% interest. Converting 0.65% to a decimal makes it 0.0065. This means that your interest in one year would be $65, because:
$10,000 x 0.0065 x 1 = $65.
The next year, your principal will be $10,065 including the interest earned. So calculating year 2 would look like this:
$10,065 x 0.0065 x 1 = $325.
To calculate how much you'd earn after 5 years, you'd have to repeat the above 4 more times, taking into account the new principal balance at the beginning of each time period. Your calculations would look like this:
| Year | Amount at beginning of year | Amount at end of year (assuming a 1.7% return) |
|---|---|---|
| 1 | $10,000 | $10,170 |
| 2 | $10,170 | $10,343 |
| 3 | $10,343 | $10,519 |
| 4 | $10,519 | $10,698 |
| 5 | $10,698 | $10,879 |
Of course, this will get even more valuable if you also contribute to the savings account during this time. It's really as easy as that: you just leave money in the account, and it pays you.
You can learn more about the RBC High Interest eSavings account here:
The RBC High Interest eSavings account is a HISA from one of Canada’s most trusted banks, offering a standard interest rate of 0.65% with no minimum deposit required, as well as a promotional rate for the first three months. Backed by RBC’s long-standing reputation, it’s a reliable and flexible option for building your savings while keeping funds easily accessible for the future.
- Impressive interest for a big bank
- High promo interest for 3 months
- Access to RBC automatic money transfers
- Free transfers to other RBC bank accounts
- 1 free RBC ATM cash withdrawal per month
- No monthly fee
- No free Interac or Plus ATM withdrawals
- No free Interac e-Transfers
- Age of majority in your province or territory
- Opening a sole account in your own name
- Living in Canada
- Automatic money transfers
- MyAdvisor service
5 common savings accounts and how they work
There are many different types of savings accounts to choose from The right account for you depends on your financial goals.
Let’s look at the most common types of savings accounts and why you might consider them.
| Account type | Details | Example account |
|---|---|---|
| TFSA | Interest earned isn't taxable | RBC TFSA |
| HISA | Higher than normal interest rates | KOHO Earn Interest |
| Savings builder | Rewards you for regular contributions | BMO Savings Builder Account |
| Kids/youth | Scotiabank Getting There Savings Program For Youth | |
| US dollar | Save in USD instead of CAD | Scotiabank U.S. Dollar Daily Interest Account |
1. Tax-free savings account
Typically, interest is considered income, and income is taxable. But in 2009, the Government of Canada introduced tax-free savings accounts (TFSAs) as a motivator for Canadians to increase their savings.
With a TFSA, any interest earned on your savings is not subject to government income tax – even when the funds are withdrawn. There is a limit on the amount of TFSA contributions you can deposit each year, and while that limit does change periodically, in 2023 it is $6,500 per year.
One of the top choices for a Canadian TFSA is the RBC TFSA, a product from RBC, one of the country's largest and most well-known financial institutions. It allows you to redeem your RBC Rewards points as TFSA contributions.
Find more info on this account here:
RBC offers an impressive spread of TFSA investment options, appealing to hands-on and laid-back investors alike. If you prefer trading your money yourself, you can open a RBC Direct Investing TFSA. But if you prefer investing to be a bit more lowkey, you can choose to invest in TFSA GICs, mutual funds, portfolios, or even a registered savings account.
- A big name you know and trust
- Get guaranteed return with a wide variety of TFSA GICs
- Take control of your investments with RBC Direct Investing
- Invest in a professionally managed portfolio with RBC InvestEase
- Open a TFSA mutual fund
- High base rates for RBC Direct Investing
- Low rates on GICs and the savings account
- No current promotion for opening a RBC TFSA
- Nothing much to separate it from the crowd
- Age of majority
- Canadian citizen
- Have a Social Insurance Number (SIN)
- Redeem RBC Rewards points towards contributions to your TFSA
- Cashable
- Non-cashable
- Building Block
- Market-linked
- U.S Dollar
2. High interest savings account
Also called high-yield savings accounts, high interest savings accounts are normal savings accounts with higher interest rates than similar accounts.
The catch? High interest accounts often come along with higher transaction fees.
Right now, the best high interest savings account in Canada is KOHO Earn Interest. This product not only gives you up to 3.5% interest, it also earns you cash back on your transactions.
Learn more here:
Want a savings account that consistently has one of the best rates in Canada? You'll want to check out KOHO Earn Interest With The KOHO Prepaid Mastercard, which gets you up to 3.5% interest, depending on your subscription level.
- No transaction fees
- Earn 3.5% interest on every dollar
- Comes with a free cash back prepaid Mastercard
- Supports major digital wallets
- Free app for tracking spending and setting savings goals
- Automate your savings with RoundUps
- Monthly fees
- You must meet your province's age of majority
- Comes with a KOHO Prepaid Mastercard which you can upgrade for even more perks
- Earn up to 6.5% cash back on your spending
- Free app for setting saving goals and tracking spending
- Savings paid on a monthly basis
- KOHO International Money Transfer allows you to send money abroad to people in over 190 countries, right from your KOHO balance
3. Savings builder account
Savings builder accounts motivate account holders to build their savings by offering interest bonuses that grow as monthly account contributions increase.
For example, say you receive 0.5% interest on the first $5,000 in your account, but if you increase your monthly contributions by $200 per month, you could receive an interest bonus that bumps up your rate to 0.75%.
An excellent example of this type of savings account is the BMO Savings Builder Account, which offers a base interest rate of 0.1%% and an additional 2% if you deposit $200 or more each month. That's a total of 0.75% possible interest if you stick to the savings plan.
You can read all of the account details here:
The Bank of Montreal has a number of savings accounts, but the BMO Savings Builder Account is designed to encourage you to become a saver, even if you’ve never been one before. It does this by having an average base interest rate of 0.1%%, but a bonus interest rate of up to 0.75% if you deposit at least $200 a month.
- No monthly fees
- Relatively high bonus interest rate
- Actively encourages you to become a saver
- No bank machines = no impulse spending
- No introductory promo at all
- Average base interest rate
- Only 1 free transfer per month, and they’re expensive after that
- Only 1 Savings Builder Account allowed per customer
- Age of majority
- Canadian citizen
- Earn max interest rate when you deposit at least $200 per month
- Bonus interest rate available for depositing at least $200 per month
4. Kids/youth savings accounts
As you’ve probably gathered, kids' saving accounts are designed especially for children and youth, usually up to age 18.
They're excellent tools for teaching children and teens the value of saving, spending wisely, and making informed financial decisions.
Kids’ accounts likely won't charge monthly fees or come with interest rates as high as you'll find with HISAs or other savings accounts. Conveniently, most childrens’ accounts will automatically update to a different type of savings account once the account holder reaches 18.
The Scotiabank Getting There Savings Program For Youth is one of our favourite kids' savings accounts for Canadians, partly because it acts as a chequing account while still offering decent interest (between 0.05% and 0.1%).
Check out what this Scotiabank account has to offer here:
The Scotiabank Getting There Savings Program For Youth is a hybrid between a chequing account and a savings account, similar to other bank accounts for kids. With no monthly fee, unlimited debit transactions, a (mostly) decent interest rate, and the ability to earn Scene+ points, this account has many benefits.
- Earn Scene+ rewards on purchases
- Earn interest on your balance
- Unlimited debit transactions
- No monthly fee
- Middling interest rate
- Mandatory account swap after graduation
- Under age 19
- Ages 12 and under must be accompanied by a parent/guardian
- ID required for age verification
- Earn Scene+ points on debit purcahses
- Earn up to 0.1% interest
5. U.S. dollar savings accounts
If you’re a snowbird or frequently visit our US neighbours, a US savings account can make things a lot easier.
The pros? US savings accounts provide a convenient way to avoid conversion fees and eliminate the hassle of withdrawing money from a Canadian account and converting it from CAD to USD.
Plus, as with all savings accounts, you'll earn interest on your money. The Scotiabank U.S. Dollar Daily Interest Account, for instance, offers tiered interest with a max of N/A. And as a bonus, it also provides 2 free debit transactions per month.
Visit this link for more information on this convenient account option:
If you have U.S. income or other sources of U.S. dollars, you can save on the USD to CAD exchange rate by depositing that money into a U.S. dollar account. The Scotiabank U.S. Dollar Daily Interest Account is one of these. Not only does it give you a place to stash your American dollars, it also has a tiered interest rate that goes up based on your daily balance in the account.
- Avoids currency exchange costs
- Tiered interest based on daily account balance
- Free with a minimum daily balance
- Also free with a Scotiabank Preferred Package
- Minimum balance to earn any interest at all
- Even top tier interest is pretty paltry
- Only 2 free transactions per month
- Tiered interest rate depending on balance
- Competitive foreign exchange rates
- No fee for U.S. dollar drafts
What is the difference between a savings and chequing account?
Savings accounts are intended to help account holders build their savings, while chequing accounts are intended to manage day-to-day transactions like direct deposits, bill payments, and electronic fund transfers.
Because savings accounts require fewer resources to manage and the bank has access to the funds for longer, savings accounts typically offer a higher interest rate than chequing accounts.
Chequing account vs. savings account fees
While it's true that most savings accounts don't come with a monthly fee, most banks charge larger transaction or withdrawal fees on savings than chequing accounts.
Here are some common bank fees for savings vs. chequing accounts:
| Savings account fees | Chequing account fees |
|---|---|
| ATM fees | ATM fees |
| Overdraft fees | Overdraft fees |
| NSF fees | NSF fees |
| Statement fees | Statement fees |
| Transaction fees | Transaction fees |
| Monthly service fees | |
| Lost card fees |
Pros and cons of savings accounts
Essentially, savings accounts are an easy place to keep money secure with the added benefit of earning some interest – however, they don’t have the high-earning potential of riskier investments.
Here are some of the upsides and downsides of having a savings account:
| Pros | Cons |
|---|---|
|
|
How to open a savings account
If you’re a teenager or a newcomer to Canada, you may not have a bank account. The good news is, opening one is simple.
There are two ways to meet the identity requirements of opening a savings account. The first, and most common, is providing two pieces of original ID (not photocopies).
One of these documents must provide your name AND address and the other must provide your name AND date of birth.
These identification documents must be from this list:
- ID issued by the Government of Canada or the government of a province, like your passport or driver’s license
- Tax documents issued by the Government of Canada or the government of a province or municipality
- Statements of benefits from the Government of Canada or the government of a province
- Current utility bills
- Bank account or credit card statements
- Foreign passports
If you don’t have the proof required above – which may be the case if you’re a newcomer to Canada – the second way to prove your identity to open a savings account is to provide any document from a reliable source that indicates your name and date of birth.
This will only work if your identity is also confirmed by a customer who is in good standing with the bank OR someone who is of good standing in the community where you are opening the account.
Once you’ve gathered the necessary ID documents, head to the bank of your choice to open an account or open one online. The agent or online portal will guide you through the entire process.
Are savings accounts right for you?
If you want to set aside money for a rainy-day fund or save for a short-term goal, your answer is likely yes!
To determine which account is right for you, first clarify your goals, then research which accounts can best help you achieve them.
Let us know how your journey goes in the comments below.
$75 GeniusCash + Unlimited transactions for $0 + Ding-free non-affiliated ATM usage.
$25 GeniusCash + $50 bonus for funding a new account, and $0 commissions on stocks & ETFs
$12 GeniusCash + Access trusted news coverage 24/7 + Digital and home subscription options.
$25 GeniusCash + Delicious meal choices with fresh ingredients + Front-door delivery.FAQ
What is a high interest savings account?
A high interest savings account offers a higher interest rate than typical savings accounts. One of the best examples is the Motive Savvy Savings Account with a 2% interest rate.
What is a tax-free savings account?
A tax-free savings account allows you to earn interest without paying tax, even when withdrawing. This is a registered account, which means it's subject to contribution limits and other regulations.
What is the best high interest rate savings account in Canada?
The best high interest savings account in Canada right now is KOHO Earn Interest with up to 3.5% interest. On top of this high rate, you'll also earn cash back on your purchases and a host of other unique benefits.
What's the difference between a chequing vs. savings account?
A chequing account is used for making everyday purchases and transactions, while a savings account holds your money for longer periods and builds your savings by providing interest on your balance.
Leave a comment
Comments