A Guide to Understanding How High-Interest Savings Accounts Work

January 9, 2024

Wondering how high-interest savings accounts work? Neo Financial™ has you covered. Learn benefits, how to maximize growth, and more now!

Wondering how high-interest savings accounts work? Neo Financial™ has you covered. Learn benefits, how to maximize growth, and more now!

High-interest savings accounts (HISAs) are a low-risk way to grow your money and make your savings goals a reality. With a HISA, you'll earn a higher interest rate than you'd get from a regular savings account. For example, a regular savings account may have a 0.5% interest rate, while a high-interest savings account may offer a 4% interest rate¹.

HISAs are becoming more popular with the rise of online financial service providers and can be a great addition to your financial portfolio. Before opening a HISA, it’s important to understand how high-interest savings accounts work.

What is interest?

Understanding interest is essential to understanding how savings accounts work. Interest is the amount of money an institution pays you for holding your money with them. Earning interest is common for many financial products, including various savings accounts, investment accounts, and GICs for example. The interest rate is the annual percentage you earn from the amoun∂t of money you deposit in your account, called the principal sum.

There are two types of interest that you can earn in a savings account: simple interest and compound interest. Simple interest is based on your principal balance at a given interest rate. You’ll commonly see simple interest in car payments and loan installments. Compound interest is the interest earned on both the principal balance and the accumulated interest from previous periods. This is what you’ll see in savings accounts and mortgages.

You earn compound interest based on the compounding frequency, which can be daily, monthly, quarterly, semi-annually, or annually. The more frequently interest is compounded in your account, the quicker your money will grow.

How to maximize growth with compound interest

High-interest savings accounts grow your money faster compared to regular savings accounts since you get a higher annual interest rate and compounding interest. Compound interest is calculated based on the total balance of your account, which includes your deposits and accumulated interest from previous periods, based on the compounding frequency. For example, with monthly compounding, your earnings are reinvested each month and future interest is calculated based on the new principal amount.

There are several ways you can maximize growth with a high-interest savings account. In addition to regularly putting money into your account, it’s also essential to start saving early. Compound interest builds wealth over time, and the earlier you save, the more time your money has to grow.

Let’s use a simple example to understand the growth power of compound interest. You deposit $5,000 into a HISA with an annual interest rate of 4%, compounded monthly. Your money is calculated daily based on the total closing balance of your account and paid monthly, which gets re-invested into the account for accelerated growth.

Here’s a quick breakdown of what the closing balance of your account will look like over 20 years:

Year Accrued Interest Account Ending Balance
5 $1,104.98 $6,104.98
10 $2,454.16 $7,454.16
15 $4,101.51 $9,101.51
20 $6,112.91 $11,112.91

Using the same example but earning simple interest, here’s what the closing balance of your account will look like over 20 years:

Year Accrued Interest Account Ending Balance
5 $1,000 $6,000
10 $2,000 $7,000
15 $3,000 $8,000
20 $4,000 $9,000

As you can see, the gap between earning compound vs. simple interest grows over time. Keeping your funds in a HISA over a long period can accelerate your savings and help you reach your goals quicker.

Now, consider the potential growth of your money in the same HISA if you contribute $500 each month ($6,000 annually) in addition to your initial $5,000 deposit:

Year Accrued Interest Account Ending Balance
5 $4,254.47 $39,254.47
10 $16,079.07 $81,079.07
15 $37,146.75 $132,146.75
20 $69,500.22 $194,500.22

In the first year, you earn $314.94 in interest, which is more than when you didn’t make additional contributions to your account. If you continue to contribute regularly to your HISA, it can add up to a sizeable increase in your account balance from interest earnings.

What is considered “high interest” in 2024?

Interest rates may differ depending on the year and financial provider. Several factors determine HISA interest rates. One of the most common factors is the Bank of Canada’s policy interest rate, which influences the rates financial providers offer on their products - from savings accounts to mortgages. If institutions want more deposits, they may raise interest rates to attract customers to open savings accounts or other financial products, or to incentivize existing customers to keep money in the account.

If you shop around for high-interest savings accounts in 2024, you may see many financial service providers offer interest rates as high as 6%. However, it’s important to distinguish between an introductory or promotional interest rate and a regular interest rate.

What are introductory or temporary promotions vs. base rates?

When trying to understand how high-interest savings accounts work, it’s important to differentiate between introductory and promotional interest rates. An introductory or promotional interest rate is a temporary interest rate. Banks like to provide these promotional offers to attract new customers and incentivize deposits. These temporary rates expire after the promotional period and then the lower regular rate will take effect. For example, you may earn a promotional rate of 3% on eligible deposits for the first five months and then drop to only 1% annually.

The regular interest rate never expires, but may be influenced by the Bank of Canada’s rate. Aside from occasional promotional offers, you will always earn the regular interest rate in your account as set by the financial provider.

Keep an eye out for possible limitations or restrictions related to the temporary promotional interest rate offered by an institution. For example, the promotion may only apply to new deposits in the account, only to new customers, or may require a minimum deposit amount.

Benefits of high-interest savings accounts

Understanding the benefits of high-interest savings accounts is also crucial to understanding how they work. High-interest savings accounts have many benefits that can help Canadians reach their savings goals every day. A strong financial portfolio includes a combination of different accounts targeted towards spending, saving, and investing.

Here are some benefits of a high-interest savings account that can help make your savings goals a reality:

Earn compound interest with high rates

As the name suggests, high-interest savings accounts offer higher interest rates than traditional savings accounts. The financial provider pays interest into your account based on the compounding frequency. For example, monthly compounding means earned interest is deposited into your account each month.

The compounding frequency impacts the rate at which your account grows. The more frequently the interest compounds, the faster the growth. An account that compounds monthly will earn more interest than an account that compounds annually as your reinvested earnings increase each month.

Easily access your funds

You can easily access the funds in your high-interest savings account anytime you want. Your money is not locked into a contract as it would be in a guaranteed investment certificate (GIC). There are no contribution limits either, so you can deposit as much or as little as you want into your account.

With online banking, transferring your money between accounts is simple. If you have multiple accounts with the same provider, you can typically transfer money between those accounts for free. The provider may charge a transfer fee if you move funds to a different institution.

Low-risk savings

High-interest savings accounts have little risk with guaranteed returns. The institution pays you interest for holding deposits with them, and you earn more interest the longer you hold the money in your account.

This is ideal for people who are risk-averse or have short savings timelines. You probably don’t want to buy risky investments with money you need to use soon. Keeping your money in a high-interest savings account ensures every dollar earns compounding interest until you withdraw your funds.

Deposit security

The Canadian Deposit Insurance Corp. (CDIC) provides deposit protection2 for accounts offered by members of the institution. Deposit insurance covers eligible deposits separately up to $100,000 per depositor per category. In the rare event that a member of the CDIC fails, the CDIC provides instant access to your covered funds, including the eligible principal and interest amounts.

No monthly fees

Most financial providers charge no monthly fees for their high-interest savings accounts. Less fees means more of your money goes into earning interest. These features vary based on the financial provider, so it’s best to check with them.

Get Started today with Neo

Understanding how high-interest savings account work is a great first step to achieving your savings goals, and a Neo High-Interest Savings account is a great financial tool to help you get there. With a 4% interest rate¹.

When you open a Neo High-Interest Savings account, you get all the benefits mentioned above. You earn monthly compounding interest at one of the highest rates offered in Canada³. You can easily access your funds and transfer money between your Neo accounts as much as you need⁴. Get peace of mind as you grow your emergency fund or reach short-term savings goals with eligibility for CDIC deposit protection².

The Neo High-Interest Savings account comes with no monthly fees and has no minimum deposit requirements. Whether you’re just starting or are well into your savings journey, you get the flexibility to save at a pace that’s comfortable for you.

You can open up to 10 different HISAs and personalize them with custom names, icons to represent different savings goals, and set targets to monitor your progress. Plus, you can instantly access your funds and transfer to and from your Neo High-Interest Savings account from your other Neo accounts4. It’s (almost) never too early to start saving with a Neo High-Interest Savings account, with accounts also available to youth (ages 13-18)⁵.

Reach your savings goals faster by opening a Neo High-Interest Savings account in less than 3 minutes.

¹ Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.

² The Neo High-Interest Savings account is provided by Peoples Bank of Canada, a CDIC member institution, and is eligible for CDIC deposit protection. Deposits held in Neo High-Interest Savings accounts are combined with eligible deposits held at Peoples Bank of Canada, for up to $100,000 of deposit protection, per category, per depositor. For more information about CDIC deposit insurance, please consult the CDIC’s website, cdic.ca.

³ Based on research of high-interest savings accounts, comparing and limited to: BMO, CIBC, Scotiabank, TD Bank, RBC, Simplii Financial, Desjardins, and Tangerine. Research conducted by Neo Financial and based on data taken from public websites on November 27, 2023. Research excludes welcome offers.

⁴ Limitations apply to Quebec residents.

⁵ Account only available to Canadian residents. You must be at least 13 years of age if you reside outside of Quebec; if you reside in Quebec you must be at least 14 years of age.

This article provides information and is not intended to provide any personalized tax, investment, financial, or legal advice. You are encouraged to seek professional advice before making financial decisions.

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