Peak Your Interest - September 2005

Most of us are told to save at least three months living expenses, just in case. Just in case we get ill, in case the furnace starts to produce arctic air, in case the car decides the transmission just won't do anymore... in case. But how many of us actually have this account in place?

As a whole, Canadians are currently at a historic low where savings are concerned (Statistics Canada, Perspectives on labour and income, Summer 2005), and we have been for several years. So if you don't have three months savings, you're not alone.

It may be this kind of information that spurred some financial institutions (most notably ING) to promote their high interest savings accounts. With a current best rate of 3.00%, these accounts belittle the average bank savings account, which generally sits at approximately 0.25% [this number varies from institution to institution and depends on your balance].

An investment of $1,000 in an average bank savings account then creates $2.50 per year, while the same investment in a high interest savings account (at the current rate of 3.0%) creates $30 per year. This affords us the opportunity to build on money that won't be transferred into another kind of investment.

This just might be the incentive some of us need to prepare for those "just in case" scenarios.

"I consider it the first goal of any financial plan," says Pat Wally, Retirement Specialist at Rice Financial. "Nobody knows when the car could have a major problem due to mechanics or accident. No one knows when they could have an illness or accident that keeps them from work-benefits don't start right away and bills don't wait."

Starting out with a savings account for those emergency situations means funds are always within reach. If you begin with another kind of investment, you may have to draw from it to cover unforeseen expenses and therefore suffer the consequences.

For example, putting your savings into a fixed-term investment such as a GIC doesn't offer the flexibility necessary in an emergency. You only have access to the interest upon maturity and if you take the investment out early, you can suffer a penalty.

Mutual funds, on the other hand, are considered longer-term investments. Should you need to draw on these funds, you could end up taking out money when the market is down-meaning you may lose on your initial investment.

Meanwhile, if you have RRSPs, the compound interest is busy working for you and really shouldn't be interrupted. If you do access the funds prior to retirement, you pay tax on the money for the year in which it was removed.

The current best rate on high interest savings accounts (3.00%) is the highest it has been in several years. Contact your Rice Financial representative to open one today. You know, just in case.