The runaway favourite financial move of early 2020 was to put money in a savings or chequing account.
The analysis firm Investor Economics has released data showing that $42.7-billion went into savings and chequing accounts in the first three months of 2020. Exchange-traded funds took in a net $14.9-billion, guaranteed investment certificates took in $700-million and mutual funds saw outflows of $4.7-billion.
How unusual is the strong preference for savings and chequing accounts during a period of the year that is often focused on investing for registered retirement savings plans? According to Investor Economics, the average inflow into these products from 2017 to 2019 was just $3-billion, while GICs generated $12.7-billion.
Seeking safety in an emergency situation like the pandemic is smart. But you can undo a bit of your good work by parking those savings in a bank that doesn’t pay a serious amount of interest.
Big banks are paying next to nothing in interest these days and in some cases they are offering zero. Higher teaser rates for new clients are available in some cases, but the rate when the offer is done is terrible. Investor Economics said slightly more than $32-billion of the money heading into savings and chequing accounts in the first quarter went to banks alone. That means big banks scooped up billions they’ll lend out at their usual rates while paying virtually nothing in interest.
Though a wide range of interest rates have plunged in the economic downturn caused by the pandemic, you can still get as much as 2 to 2.25 per cent interest at some alternative banks, trust companies and credit unions. As with big banks, deposit insurance is available for deposits at alternative banks through Canada Deposit Insurance Corp. Credit union-owned online banks have their own provincial plans. (Details here about Manitoba’s plan.)
Interest of 2 per cent sounds lame, but consider this. The inflation rate in April fell 0.2 per cent, which means that you’re able to keep all of your gains on an after-inflation basis. A year ago, the inflation rate was 2 per cent.
After-tax gains from savings are another matter. Interest income is taxed at your usual rate, which means you’ll lose some of your gains if they’re not held in a tax-free savings account. But at least you’ll still have something to show for the savings you handed over to a bank, trust company or credit union offering a decent interest rate. The same cannot be said if your money is sitting in a big bank.
-- Rob Carrick
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