Everyone needs some cash sitting around.
There are many reasons we hold cash: for day-to-day expenses, as an emergency fund, or for an upcoming expense like a trip, a new car, or a down payment on a house.
Despite its simplicity, your cash deserves to be treated well. With interest rates rising, what to do with your cash is becoming a more interesting topic.
Not all cash should sit in your chequing account or even a savings account. Depending on when you'll need the money and how much flexibility you need in withdrawing it, you've got a few options.
Time horizon and flexibility
For maximum flexibility and very short-term money, a chequing account does the trick. If you have money for slightly longer-term expenses, like property taxes or an annual vehicle insurance renewal, a savings account will pay you a bit of interest (and I mean a bit). For known time horizons like a planned trip, you can put the funds into a GIC. GICs pay better rates, but you can't take the money out before the maturity date (generally). There's also the option of using a money market mutual fund, which is very flexible but doesn't offer a guaranteed rate of return and returns have, in recent years, been very low. Rates and flexibility are a trade-off.
A word about savings accounts. It may seem like a simple product, but savings accounts vary greatly in terms of the fees charged and interest paid. Some banks charge $5 to withdraw funds, but might offer free transfers to another account with the same institution. Generally, the more free transactions you get, the less interest you'll be paid. Also look carefully at the interest: some banks don't pay any interest on balances under $5,000 for a regular savings account. And finally, watch out for the special offers. A bank might show you a juicy rate in large font, with some small print saying you'll only get this rate for a short time before it goes to the regular (lower) rate.
Most importantly, if you have cash sitting around for long-term goals and you haven't decided what to do with it, it's time to figure it out. Determine whether it should go into an RRSP, TFSA or another kind of account and get it invested.
Cash doesn't have to earn 0%. Take advantage of the fact that rates are rising and give your cash some respect!
Take care of yourself (and your money),
Anita Bruinsma, CFA
Clarity Personal Finance
