How does a high-interest savings account work?

With a high-interest savings account, you’ll earn a lot more interest than you would with a traditional savings or checking account. That means you’ll generate more money from your savings over a shorter amount of time.

What's the catch? Sometimes with a high-interest account, you need to make a minimum deposit, maintain a minimum balance or pay regular fees — though that’s not always the case.

APY

When you start looking for a high-interest savings account, the first number you’ll see will be APY, or annual percentage yield.

APY is the yearly rate of return on the money in your account, and it includes compound interest, which is the interest earned on your interest.

The more often your investment compounds and builds interest on the interest you’ve already earned, the faster your savings grow.

Comparing rates

So how much higher is the interest on a high-interest, or high-yield, savings account? As of June 2022, the best rates topped 3% — more than 200 times higher than a traditional savings account.

If you were to put $10,000 into a traditional savings account with a 0.01% interest rate, you’d earn only $1 in interest during an entire year.

Compare that to high-yield accounts with a rate of 2%, which would earn you $200 in interest over the course of a year — quite a difference. And that’s without making any monthly deposits.

At the same 2% rate, making a monthly deposit of $200 over one year would earn you $222; over three years it would earn you $824, and over five years it would earn you $1,645.

As you can see, making regular monthly deposits into a high-interest account will lead to serious gains over time.

More: Start earning with a high-interest savings account today

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Where to find a high-interest savings account

Like traditional savings accounts, high-interest accounts are federally insured up to $100,000 if you're dealing with a bank insured by the Canada Deposit Insurance Corporation (CDIC), or a credit union insured by provincial deposit insurance providers.

Old-school brick and mortar financial institutions aren’t your only secure option though; a growing number of high-yield savings accounts are being offered by online banks, and the CDIC insures many of them as well.

And since the Bank of Canada has slashed interest rates in the wake of the coronavirus pandemic, many of these small online banks are offering better high-interest savings options than their big-bank competitors at the moment.

Should I get a high-interest savings account?

The great thing about high-interest savings accounts is they’re versatile. Whether you’re planning for your wedding or preparing for retirement, you can rest easy knowing that the money you’re putting towards your goal is growing.

Some popular reasons for opening a high-yield account include:

  • Building an emergency fund.
  • Saving up for a big purchase, like a car or a home.
  • Starting a nest egg.
  • Creating a college fund for your kids.
  • Protecting your money against inflation.
  • Helping your general savings grow.

Whatever your goals are for your savings, opening a high-interest account is a smart move.

But before you jump at the first account your bank offers you, it’s worth it to shop around a bit and see what’s out there. After all, you’re not obligated to stick with your current financial institution if you can find a better rate somewhere else.

More: Types of bank accounts

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Comparing savings accounts

Before you open an account, it's a good idea to compare offers from a few financial institutions. Here are a few key things you should look for when comparing your options for a high-interest account.

Interest rate

Obviously you’ll be looking for accounts with high interest rates, but make sure to clarify whether the rate being offered is standard or if it’s an introductory rate that will eventually go down. The highest rate isn’t always your best bet if it’s going to drop after just a few months.

You should also look into whether there are minimum or maximum thresholds you need to meet in order to maintain your rate, and confirm that they’re doable for you.

Fees

Some financial institutions may charge introductory fees for opening a high-interest account, and monthly maintenance fees for keeping it open. It’s important that you understand what these fees are and whether there are ways to avoid them.

Access to your money

How easy it will be to access the money in your high-yield account is another thing to consider. Some banks will allow you to make withdrawals instantly using an ATM card, while others may require a waiting period of several days before your transaction is processed.

Compounding offer

Lastly, you should find out how frequently the interest you earn from your account will be compounded. An account in which interest is compounded daily will grow your savings faster than an account where interest is compounded yearly. The more often interest is added to your balance, the more growth you’ll see in your savings.

Put your cash in the right place

One of Canada’s highest-earning savings accounts, EQ Bank, will earn 1.50% interest on every dollar you save. That’s 150 times better than a chequing account with a 0.01% annual percentage yield (APY).

Let’s say you use your savings to create an emergency fund, which experts say should cover at least six months’ worth of your regular expenses.

If you put $9,000 — enough to cover $1,500 a month for six months — into a high-interest account at 1.50%, you’ll earn $135 in interest over the course of a year. And if you leave it in a regular chequing account at 0.01%? You’ll make less than a dollar. Don't let your cash stagnate and try a high-interest savings account today.

About the Author

Shane Murphy

Shane Murphy

Reporter

Shane is a reporter for MoneyWise. He holds a bachelor’s degree in English Language & Literature from Western University and is a graduate of the Algonquin College Scriptwriting program.

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