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Living paycheque to paycheque is incredibly stressful. Even the slightest hiccup in life can send you into a financial tailspin if you don’t have some extra cash to fall back on. 

Saving money is crucial to being financially responsible and it can truly be a lifesaver in many financial emergencies. In fact, there are tons of reasons why putting money away is a sound idea, including the following:

  • To save for retirement
  • To save for a large upcoming expense, such as a car or a house
  • To save for an unexpected emergency
  • To get out of debt
  • To become financially independent

Clearly, having extra money on the side is very important. But is it worth putting your money in a savings account, or are there other ways to save your cash?

Is It Worth Putting Money In A Savings Account In Canada? 

A savings account is often the go-to resource for Canadians when it comes to storing their money. Not only will it be kept safe, but it can also collect some interest, albeit very little. But depending on your savings goal and the rate of inflation, a savings account may not always be the best choice.

Thankfully, there are also other means of housing your hard-earned capital. 

High-interest Savings Account

Certain savings accounts are designed to be a little more aggressive with interest earnings and offer higher rates than traditional savings accounts. You may be able to make your money work a bit harder for you and earn a little more money every year thanks to a higher interest rate.

Tax-Free Savings Account (TFSA)

A TFSA is another safe haven for your extra cash. These accounts are registered tax-advantaged accounts that can help you earn money without being subject to taxation. 

Any gains you make from the interest paid out on your deposits will not be taxed. You can hold investments that generate interest, capital gains, and dividends, all tax-free. 

Registered Retirement Savings Plan (RRSP)

An RRSP is commonly used among Canadians to save for retirement. This type of account is meant to hold savings and investment assets and offers several tax advantages compared to other types of investment accounts. 

What Is The Inflation Rate In Canada?

Inflation is a measure of the rate of increase in prices of goods and services and decreases the purchasing power of money. Inflation is measured by economists through the Consumer Price Index (CPI), which establishes the price of common goods purchased by the average consumer, including food, housing, clothing, and gas, among others. The change in the price of goods is measured over time. 

The amount of inflation in the overall economy is estimated based on the percentage change in the price of goods. 

According to Statistics Canada, the annual rate of inflation currently sits at 4.7%. That marks the biggest year-over-year increase since February 2003. In particular, gas prices have increased at the highest rate compared to other goods, at 41.7% in October compared to the same month in 2020. 

What Happens When Inflation Increases? 

Inflation directly impacts the cost of living and the economy overall. When inflation occurs, basic products become more expensive, making it more difficult for the average consumer to afford the necessities of life. This is especially true when the rate of inflation increases at a much faster pace than wage increases. 

Check out the minimum wage rates in Canada.

To illustrate the impact of inflation over time, let’s say a cup of coffee costs $2 today. At a rate of 5% every year — which is just slightly higher than where the inflation rate is today — that same cup of coffee would cost $3.26 ten years later. And in thirty years, the cost of that same cup of coffee would be $8.64. 

What Is The Interest Rates Can You Get On A Savings In Canada?

The interest rate you are given depends on whether your money is being held in a regular savings account or a high-interest savings account. Right now, regular savings accounts typically come with a rate of 0.5%, whereas high-interest savings accounts have rates that go as high as 2%, depending on the financial institution. 

Financial InstitutionAccount NameSavings Rate
EQ BankSavings Plus AccountUp to 4.00%*
CIBCRRSP Daily Interest Savings Account1.25%
EQ BankTax-Free Savings Account1.25%*
Wealthsimple Cash Savings Account0.50%
CIBC eAdvantage Savings Account1.25%
motusbankTFSA 2.25%
Tangerine Savings Account 1.00%
Oaken Financial Savings Account1.20%
Simplii Financial Savings Account0.40% to 5.50%
*Interest is paid monthly and calculated daily on the total closing balance. Rates are subject to change without notice.

How To Calculate The Impact Of Inflation On Your Savings

To understand the effect of inflation over time, you’ll need to determine what the dollar value will be in the future based on the rate of inflation. As mentioned, the same $100 over 50 years ago eventually became worth $14.02 based on the annual rate of inflation from 1968 to 2018. 

It’s helpful to understand the “reduced” and “required” amounts when calculating inflation. The reduced amount refers to the value of a specific dollar amount at a specific date into the future, while the required amount refers to the amount of money needed at that date in the future to match today’s purchasing power amount.

To illustrate reduced and required amounts, let’s use a current value of $1,000 and today’s annual inflation rate of 4.7%. In 20 years, the value of today’s $1,000 would be $399.09. This is the “reduced” value.

The “required” value over 20 years would be $2,505.73, which is the amount needed in 20 years to match the initial $1,000. 

Today’s Amount  $1,000
Inflation Rate4.7%
Number of Years20
Value in 20 years (reduced amount)$399.09
Amount needed in 20 years to match today’s purchasing power (required amount)$2,505.73

To calculate these two figures, use the following equations:

  • Reduced amount = Amount ÷ (1 + inflation rate)^number years
  • Required amount = amount x (1 + inflation rate)^number years

So, how much money could you save if you put that $1,000 into a savings account with an interest rate of 2% and made monthly contributions, based on today’s inflation rate of 4.7%?

In 20 years you’d save $16,355.94 and with a 4.7% inflation, it’d be worth $6,527.42. 

Initial deposit  $1,000
Monthly deposits$50
Savings interests rate2%
Years invested20
Inflation rate4.7%
Total of deposits$13,000
Interest earned$3,355.94
Total saved$16,355.94
Value of Money after 20 years$6,527.42

Should You Always Invest Your Money?

It’s one thing to “save” your money, and it’s quite another to “invest” it. But what’s the difference, and is one better than the other?

Saving your money simply refers to putting your cash in an account for safekeeping without any active means of aggressively growing that money over time. It’s the more conservative way to handle your finances because the dollar amount in the account won’t usually decline unless you withdraw the money. 

The thing with savings accounts, however, is that they usually come with a very low interest rate, which means your money won’t grow very quickly. And since interest rates are usually lower than the inflation rate, you could risk losing some purchasing power over time.

Investing is designed to make your money grow much faster over time and is part of an overall wealth-building strategy. By holding money in an account that pays out higher interest rates, there’s a better chance that the money will grow faster as the months and years pass. But there’s also more risk involved with investing versus saving.

Here are some pros and cons of investing to help you decide which way to best handle your money.

Pros

  • Potentially higher returns 
  • May not require as much in contributions to reach your goals thanks to higher returns

Cons

  • Risk of decrease in value of investments

When Is It Worth Putting Your Money In A Savings Account? 

Before deciding to stash your money in a savings account rather than investing it, consider the perks and drawbacks of this financial strategy.

Pros

  • Dollar amount won’t decline
  • More predictable timeline to reach your financial due to absence of risk

Cons

  • May lose purchasing power as a result of inflation
  • More money may be required to be saved to reach the same financial goals with investments

Savings Account FAQs

Should I invest or save?

If you have short-term financial goals and don’t have an appetite for risk, consider saving. On the other hand, if you have long-term financial goals and prefer to have an opportunity for greater returns, consider investing instead. 

Should I keep my emergency fund in a savings account or an investment account?

Generally speaking, the funds kept in a savings account are more liquid, which means you’ll be able to access them much faster and easier compared to an investment account. When you need money right away, you want to have the benefit of liquidity. In this case, a savings account might make more sense for an emergency fund. 

How do I beat inflation?

Always shop around for competitive interest rates when it comes to your money. Different banks and accounts may offer higher rates than others. 

Final Thoughts

Having extra money in the background is always a good idea. Whether you just want to have some extra cash on hand to cover added expenses, save up for a big purchase, or make sure you’re taken care of during the Golden Years, it’s always wise to save. And while savings accounts are always a viable option, there are several other ways to save — and grow — your money.

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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