The oxymoron above has become truly funny over the past few months. As the man on TV likes to say, "Save Your Money". Nowadays, trying to actually earn some interest is becoming more and more difficult. As of June 7, 2009, the average savings account pays .83% interest per year. To put that in perspective, if you invested $10,000 for one year, you would earn roughly $7 per month BEFORE TAX. On an after tax basis, the average Canadian would earn $60 for the year on a $10,000 investment.
Does that mean you should stop saving money - of course not. What it does imply is that people really need to be smart about the ways they save their money right now. Experts agree that people should have an emergency fund of between one and three months income. But where should you put those funds? In the past, we always looked at traditional savings plans (savings accounts, GIC's or Canada/Ontario Savings Bonds). Posted GIC rates are notoriously inaccurate, but based on current numbers, you don't want to lock up your money for long periods of time. Even so, most one year GIC's only pay a slightly higher return than a savings account. Government Savings Bonds offer similar returns to GIC's but have the flexibility of being cashable. However, they are usually only available for purchase during specific times during the year.
The advent of the Tax Free Savings Account in 2009, offers perhaps the best way to have that "rainy-day" account. With similar interest rates to "savings" accounts, but no taxes to pay, they offer flexibility and the benefits of keeping all of the interest. With a married couple, they could each set aside $5,000 which would be a sufficient amount for most people for an emergency.
Is there something smarter to do? It depends upon your situation. I run into people who have money set aside for an emergency, and they owe $10,000 to $20,000 on their line of credit or credit cards. The interest on these debts is not tax deductible and often runs as high as 28%. Here's some perspective from the above example. A couple owe $10,000 on a credit card with an interest rate of 18%. The interest is effectively $1,800 per year or $150 per month. Why have the "emergency fund" at a cost of $150 per month. Pay down your debt, and then save the $150 per month in a TFSA to create an emergency fund. What do you do if you have an emergency? Use the credit card but ONLY FOR AN EMERGENCY.
Other suggestions - pay down debts, put the money towards an RRSP (which gives the average Canadian a 31% refund), or pay down your mortgage. The only thing that is High Interest in the savings market nowadays is the fact that people actually pay attention to what they earn. The harsh reality is that with the Bank of Canada planning on maintaining a low interest rate environment to stimulate the economy, expect these rates to remain low well into 2010. We need to be smart about saving our money and paying our bills. Nowadays, it doesn't seem to matter where you save your money - it won't earn that much anyway.
As always, Stay Well and Pay It Forward.