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| Academic Performance | Financial Survival | Social Life | Nutrition and Health | |||
By
UniversityAdvice.com Staff,
May 2006
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Savings Accounts Savings accounts operate more or less the same way as the chequing account you currently use. You can add money to your account by making a "deposit" and you can remove money by making a "withdrawal". While your money sits in your account, the bank lends it to customers who seek to borrow money. The bank will then deposit interest payments to your account on a monthly basis. To understand the way this works, consider the following scenario. Brad McDonald is a high school student at York Mills Collegiate Institute in Toronto. He just got a great summer job working at the Food Basics grocery store near his house. The job is paying him 250 dollars per week. At the end of every week, the store manager comes to see Brad to personally deliver him his paycheque. Brad then hurries to his local Scotiabank branch where he hands over his cheque to the teller and instructs her to place the money into his new Scotia "MoneyMaster" savings account so that he can begin saving for his future university studies. His account now has a balance of 250 dollars. Daniel Smith is currently a second year university student at McGill University in Montreal. He just received his tuition bill from the university in the amount of 5 000 dollars and finds that he is 250 dollars short as he did not save enough money while in high school the way Brad has been doing. In a frenzy, Daniel calls his account manager at his local Scotiabank branch in Montreal and requests a 250 dollar loan so that he may pay his tuition. The branch manager knows Daniel is trustworthy and has always paid back his loans in the past and thus agrees to loan him 250 dollars that belong to Brad in Toronto. In return for lending his money to Daniel and not getting to enjoy his hard earned money for a year, Brad expects to receive some compensation in the form of "interest". The bank also expects to make a profit for lending the money to Daniel. Therefore, Daniel is told that he can keep the 250 dollars for one year on the condition that he pays the money he borrowed plus $12.50 (5% of $250) one year from now. One year later Daniel's account manager calls him and reminds his borrower that he owes 262.50$ (the original $250 plus the $12.50 charged as interest). Daniel has since made some money at a summer job of his own and dutifully pays the 262.50$ to Scotiabank. The bank then deposits 10 dollars in Brad's account (equivalent to 4% of 250$) and keeps $2.50 for its troubles (1% of 250$). Brad has now made 4% in one year for keeping his money in his savings account. The bank has just made $2.50 for doing nothing but loaning one customer's money to another. As you can imagine, this makes banking a very lucrative business indeed. Why doesn't Brad just loan the money directly to Daniel and collect the entire 5% ($12.50) instead of only 4% ($10)? Brad and others choose to lend through banks because they provide the advantages of convenience and security. Brad need only walk over to his local bank and make a deposit. The rest of the details are taken care of by the bank. Without a bank, Brad would have to find someone like Daniel who wants to borrow money himself, make the necessary arrangements and collect the money plus interest when the time comes. Moreover, when the time comes to collect the loan plus its interest, Daniel may refuse to pay or be unable to do so. The bank, with its army of lawyers, may be more successful at getting the money back than would Brad on his own. As well, only a small portion of all loans given out by the bank will require legal action to collect. The bank can therefore spread the costs of such litigation across a large loan portfolio (money deposited by many customers) and pay for it using the profit it makes. If Brad finds the need to sue Daniel to collect his money, he will be paying all such legal fees on his own and will quickly find that is has cost him more than the $12.50 he will have made from loaning out his money. For these reasons, the vast majority of people lend their money through financial institutions rather than directly. The amount of interest you receive for depositing your money in a savings account is determined by the bank's current interest rate. These rates change from time to time, as they tend to follow the Bank of Canada's trend setting "overnight lending rate". This is a rate, set by the Bank of Canada (which manages Canada's money supply), which determines the interest rate at which banks can lend each other money and can borrow money from the Bank of Canada itself. A bank will borrow money from another bank or from the Bank of Canada when it has run out of money to lend from the accounts of its customers and would like to continue lending more money. In this way, the interest rates banks pay and charge their customers will be influenced by the rate at which they can borrow money themselves. When the general Canadian economy is doing poorly, the Bank of Canada will lower interest rates in an effort to make it easier for individuals to borrow money. The hope is that as money becomes easier to access, more people will borrow and will then spend that money. This extra spending will stimulate the economy and help turn things around. When the economy is doing well, the Bank of Canada will raise interest rates to ensure the economy does not expand too rapidly. The setting of this rate is referred to as "monetary policy" and is independent from political influence. The important thing to remember here is that the Bank of Canada's interest rate only influences the savings interest rate paid by banks to you. Therefore, each bank is free to set their own interest rate and comparison-shopping for savings accounts can thus prove useful. Generally,
the best savings rates can be found at virtual Internet banks. These banks
do not maintain brick and mortar branches as do the big five Canadian
banks (CIBC, TD Canada Trust, Scotiabank, Bank of Montreal and the Royal
Bank). Not having to pay tellers nor having to heat and maintain buildings
allows these banks to realise significant cost savings which can be passed
onto bank customers in the form of higher interest rates on savings accounts.
In our student banking
article we discussed a few of these alternative virtual banks. The
following is a list of some more financial institutions that provide high
savings rates.
Peruse the links on the left, and determine for yourself which savings account provides the best balance between features and interest rate. These accounts have all been designed for saving money and are not suitable substitutes for chequing accounts. You will therefore have to keep a chequing account handy for your day-to-day banking needs (i.e. for writing cheques, making Interac direct payments, depositing cheques, paying bills, etc…). Keep in mind that the interest rates financial institutions quote are always annual. Therefore, if you keep your money in your bank account for only one month, you will receive only one twelfth of the quoted rate. The first two financial institutions on our menu, Achieva Financial and Outlook Financial, are not banks. They are "Credit Unions". A credit union is a financial institution that provides all the same services as a bank, but that does not seek to make a profit. When you open an account at a credit union, you become a part owner of the institution, and have the right to elect the board of directors that manage the union. Because credit unions do not attempt to extract a profit from their operations, as do banks, they can often provide superior services at better rates. Another difference is that banks are regulated federally while credit unions (called Caisses Populaires in Quebec) are provincially chartered. ING Direct and President's Choice Financial are virtual banks. The Bank of Nova Scotia, a traditional bank, provides the last account listed. The advantage
of savings accounts is that you can get your money out at any time with
no penalties and have no risk of losing your money. They are also very
simple to use. On the other hand it may be possible to earn more money
by investing in GICs, stocks or mutual funds. Next we take a look at GICs. Article
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