At What Point is it Worth Doing Something With Your Money?

Question

I (a Canadian) have never done anything with finances, don't have an income nor any expenses. I have about 20K sitting in a pile in a TD Canada Trust Account due to the government sending HST checks and a job I had for a few months a while ago.

I recently heard about Tangerine offering a 2.75% interest rate on a Savings Account, but they seem completely unwilling to list any important details on said account. Which lead me to wondering, what is the optimal solution to $20K?

I am vaguely aware of investment options where you give up the ability to get at the money for years\decades.

But I guess what I am primarily interested in, are their alternatives similar to a bank account but with positive interest rates? Where I can pay for things directly from the account, or have the account automatically cover a credit card, and be paid by the financial institution for keeping my money with them? What sort of Interest rates should I expect, if any?

Answer 1

The main thing to consider is how liquid you need the money to be (i.e., how fast you can turn it into a spendable form), and how much risk you can tolerate.

When you want near-total liquidity (100% of the money is available within days or less, on demand), and you want minimum possible risk of loss of value, you will only be able to get a low interest rate. In the US and Canada, its hard to get much more than 1-3% per year.

Your best option in Canada and the US is generally an interest-bearing savings account, which allows you to get the money within a day or two when needed. Most people can get one that offers 1-2% interest yearly, with special offers sometimes getting close to 3% but often are for a limited time or have deposit total requirements. For example, from my searching the Tangerine offer only gives 2.75% for a limited time to new clients (6 months, for example), and then the rate goes back down close to 1%. This is pretty typical for savings accounts.

As long as the bank is legitimate and covers government-equivalent deposit insurance, historically such funds have been extremely safe in the US and Canada (I know of no lost money due to bank failure that wasn't covered by the deposit insurance). So risk is about as low as you can get, given that sticking cash under a mattress or burying gold in the backyard also comes with its own risk of loss.

If you are willing to give up immediate liquidity, you can squeeze a little more interest out of other similarly low-risk investments, but its hard to get much more interest while keeping quick access to the money and not having a greater risk of loss. Guaranteed Investment Certificates (GIC, equivalent of the US certificate of deposit, CD) can lock in the money for an amount of time that is up to you (30 days to 5 years each), and depending on the length of time and prevailing rates you might be able to squeeze out above 2% interest. Treasury bills and equivalents give similar returns. You can also look at money market accounts.

But for short periods so as to allow access to all funds with no more than about a 1-2 month notice, its hard to find any guaranteed rate of return with little risk and high liquidity that will go far from 2-3%. Keeping all the money in a checking account, so you can spend it all with no advance notice will only get lower rates, often a fraction of a percent if any at all.

Keep most of the extra money in one of the insured, interest-bearing savings accounts and use a cashback no-fee rewards card that gets you an extra 1-2% back when you spend money (paid in full monthly), and you'll have maximum liquidity, near-maximum availability of money, and you'll get as much interest on the money as you can get.

If you want any additional returns on your money, you'd have to accept longer rates of money lock-in and/or accept possibility of loss in value. No free lunch, and all that.

Answer 2

High-yield savings accounts are great options for generating returns on your cash with little to no risk.

While they do offer features for transfer, I think it's best to use separate accounts for your higher-volume transfers/payments (i.e. credit cards).

So, with 20k, you could put the money you don't need for expenses in the savings account and keep the rest in your primary bank account.

I live in the US so I cannot make any recommendations for Canadians, but I use Wealthfront and Betterment for their high-yield savings and keep my normal checking account for regular transactions.