If you're sitting on some savings, you may be wondering where to park your money. Is a chequing account the best place to house your hard-earned dollars? Or should you stick those bucks into a savings account? What's the difference between the two accounts anyway?
Ideally, everyone should have a chequing and a savings account. Both are essential money management tools, but each serves a certain purpose. The key is to understand the differences, as well as their unique features, so you can make an informed decision about how to best use them.
A chequing account is used to store your daily spending money. It's designed for everyday transactions, such as depositing paycheques, paying bills, debiting purchases, transferring money online or making ABM withdrawals. A chequing account typically comes with a debit card and a chequebook.
With a chequing account, your cash is securely stowed but also easily accessible. Whether it's using a debit card or an ABM, you can withdraw cash almost instantly.
The downside is that a chequing account offers little to no interest. As a result, it's not an ideal place to store savings for an extended period of time.
A savings account is used to safely store your money over a longer time, while also earning interest. Savings accounts pay higher interest rates compared to chequing accounts, making them a great place for your emergency fund and longer-term savings. You just deposit the money and then watch it grow.
Unlike a chequing account, a savings account is generally not used for everyday transactions, such as paying bills or cashing cheques.
But the overall benefit is earning a higher interest rate while keeping your money safe and accessible. You can access the funds anytime without any penalties or tax implications. Unlike other savings vehicles, such as a Tax-Free Savings Account (TFSA), there are no limits to how much you can deposit into your savings account. Your money in savings accounts, chequing accounts, guaranteed investment certificates (GICs) and other term deposits holding up to $100,000 are insured by the Canada Deposit Insurance Corporation (CDIC) against most fraud and loss.
Before you can make any investment decisions, know these core differences between chequing and savings accounts.
Debit transactions are withdrawals from your accounts, such as cash, cheques drawn on your accounts, bank transfers out, bill payments, pre-authorized payments and Interac debit or Visa debit purchases.
When it comes to withdrawal frequency, a chequing account will typically allow you to make a higher number of withdrawals per month without additional fees than a savings account. Some accounts even offer an unlimited number of withdrawals, although most will still have daily and weekly maximum amounts without visiting a branch.
With a savings account, there are often limits attached to the number of withdrawals you can make. Technically, you can withdraw money from your savings account at any time, but if you exceed the number of withdrawals your bank permits, you'll be charged a fee.
Monthly account fees
Most chequing accounts come with a monthly account fee. The amount you pay will depend on the type of chequing account and the services offered. For example, the monthly account fee may increase based on the number of transactions you can perform without additional fees.
In contrast, a basic savings account may have no monthly account fees, but the trade-off is that the number of free transactions each month is more limited. If you want access to unlimited transactions or additional services, then you'll likely have to pay for it.
There are things you can do to avoid paying monthly account fees. For starters, many banks will waive monthly account fees if you maintain a minimum daily closing balance for the entire month. However, if your balance drops below the minimum required by your bank at any point in the month, then you'll be charged the fee for your account that month.
While some chequing accounts do pay interest, the interest rates are usually minimal. In contrast, savings accounts offer much higher interest rates compared to chequing accounts.
A high-interest savings account (HISA) may be the way to go if you want to get the most bang for your buck. An HISA offers even higher interest rates than a regular savings account, helping you to reach your financial goals even faster.
A few other things to note about savings accounts and earning interest:
- Typically, any interest earned in a savings (or chequing) account must be reported on your income tax return (unless it's a TFSA savings account). If the interest earned is greater than $50, your financial institution will send you a return of investment slip (T5), which shows how much investment income you earned over the year. You can use that T5 when you file your annual income taxes. If the interest earned is less than $50, a T5 slip shall not be issued, however, you must still report the interest as earned income on your tax return.
- To start earning interest, some banks require a minimum deposit. For instance, you might need to maintain a balance of $1,000.
Ideally, it's best to have both. Since they serve different purposes, both accounts are useful for money management. A few examples:
- Simplifies household bookkeeping: Having both savings and chequing accounts allows you to easily organize and split your cash into two streams – spending and saving – as well as monitor transactions.
- Helps control spending: With only a chequing account, it means a lump sum of cash is just sitting there, ripe for excess spending. A savings account ensures that you won't inadvertently dip into those dollars designated for short-term or long-term savings.
- Eases tax returns: If you're looking to minimize the amount owed, stowing some money in a low or no interest chequing account could help soften the blow at tax time.
If you have questions, a Scotia advisor can help you find an option that works for you.
When making your decision, be aware of the pros and cons of each account.
Pros of a chequing account
- Convenient for everyday banking transactions and purchases
- Easy access to your money using a debit card, cheques and ABMs
Cons of a chequing account
- Likely charges a monthly account fee
- No or lower interest rates compared to a savings account
Pros of a savings account
- Higher interest rates on deposits
- Often no monthly account fee
- Lower-risk account to save your money as compared to an investment account on the stock market
Cons of a savings account
- Typically a limited number of debit transactions you can make without incurring a fee
- Likely lower interest rates compared to an investment portfolio in the stock market
- Not designed for everyday banking or frequent withdrawals
There's no magic number for how much to carry in your chequing account. An exact amount will depend on your budget and comfort level.
However, as a rule, you should have enough in your chequing account to cover fixed expenses (e.g., rent, mortgage, bills, utilities and so forth), as well as a little extra for unexpected charges. You want to avoid getting any non-sufficient fund (NSF) fees.
A simple strategy is to use the 50/30/20 rule – a budgeting technique which allocates 50% of your after-tax income to fixed expenses (e.g., housing, bills, groceries, etc.), 30% to variable spending (e.g., clothes, entertainment, dining out) and 20% to savings or debt repayment. So, if you earn $4,000 per month after taxes, that means putting $2,000 into your chequing account to cover essential expenses.
There are circumstances where you may keep more money than needed in your chequing account. For instance, some banks will waive the monthly account fee if you maintain a minimum monthly balance. However, it's up to you to determine if this is the best place to store that money, as you could earn a higher interest rate with a savings account.
How much money you keep in your savings account depends on your financial goals. If you're using your savings account to store your emergency fund, then a general rule is to save enough to cover three to six months of fixed expenses.
For short-term savings, it depends on how much you can afford to save every month. You could follow the 50/20/30 budget rule and allocate 20% of your after-tax income towards savings. So, if you earn $4,000 per month after taxes, that means saving $800 per month towards reaching your financial goal.
If your savings goal is longer than five years, you may want to put your money in an investment account to maximize growth. Because of inflation, your money can start to lose its value if you leave it sitting in a savings account. Historically, a diversified, risk-appropriate investment portfolio can produce inflation-beating returns,1 whereas savings accounts tend to offer lower interest rates that keep up with inflation.
When trying to determine if you should put your money in a savings account versus an investment account, think about the following:
- Timeline: When do you need to access the money? If you'll need it in the next few months, a savings account is the way to go. If you've got decades ahead of you, building a diversified, risk-appropriate portfolio usually produces higher returns and will help grow your savings.
- Accessibility: How easily do you want to be able to access the money? It's generally easier to withdraw your money from a savings account versus from an investment account.
- Risk tolerance: Can you stomach stock market volatility? A savings account is a very low risk whereas an investment account is subject to the ups and downs of the stock market.
Nonetheless, if your bottom line is safety and a higher interest rate, then a savings account is probably the right fit. The stock market typically comes with volatility, and fluctuating stock prices and bond prices can affect your annual returns. With a savings account, you can still reap the benefits of higher interest rates without risk and increase your savings just by making regular deposits and watching your nest egg grow.
With the global pandemic, the Bank of Canada avoided interest rate hikes and left the interest rate at a historic low. But the central bank, like others around the world, is raising interest rates to fight the highest inflation in about 30 years.2
As interest rates rise, the cost of taking out a loan (such as a mortgage or car loan) also goes up. But higher rates bring good news for savers. The Bank of Canada rate hikes increase interest rates paid on deposits, guaranteed investment certificates, and other savings vehicles.3 That helps grow your wealth faster.
The bottom line
Both chequing and savings accounts are essential tools for money management. While a chequing account provides easy access to your money for daily spending, a savings account can help you to achieve your short-term and long-term financial goals. When used in combination, these accounts can offer a solid foundation for your personal finances.
For more financial and investment advice, book an appointment with a Scotia advisor, who can help you understand the options and create a personalized financial plan that works for you