When saving up for a purchase, where can I put away cash every month so that it gains interest and it can be withdrawn without penalties?
In one of our earlier posts we talked about saving up to make purchases rather than buying items on credit. This helps avoid debt and related interest payments. Waiting to save up to buy new things also puts a buffer between our whims and making a purchase, getting us to slow down and consider our priorities.
One of the most straight forward places to store money until it is needed for a large purchase is in a savings bank account. It may not seem flashy or glamorous, but savings accounts are relatively secure and stable. They generally don’t have any fees or penalties for withdrawing money, and a high interest savings account (HISA) can accumulate a small amount of interest on money deposited.
In short, savings accounts are stable, flexible, and safe. If you plan to spend the money within a year, a savings account is a good option.
For people looking at saving money for more than one year, but less than five years, there are two options which can work well. There are a range of products specifically designed to supply a small amount of interest (more than a savings account while less than a well performing stock). One of these is called a guaranteed investment certificate (GIC). A GIC, as the name implies, is guaranteed. It will not lose its value and a GIC will grow at a low rate. Depending on the provider and the bank’s interest rate, a GIC usually grows at 1.5% to 4% per year and is guaranteed to not lose your money. The drawback is you can’t take money out of a GIC early, at least not without a penalty. In other words, a GIC is a good medium-term place to stash money, just be sure you don’t need to make the withdrawal early.
A related product, called a term deposit, is a similar concept. Like a GIC, the money put into a term deposit will grow slowly and is usually guaranteed to be there at the end of a specified amount of time. A term deposit can usually be set up to run for one to five years. This allows your money to grow slowly while you can rest assured it will be there in a year or two when you are ready to use it.
Some people like to look at investments as a place to store money, but the stock market can be fickle (and unstable). While your money might grow if you put it in the stock market, it’s also entirely possible your investment fund will drop in the short-term and the money you saved won’t be available anymore. While the stock market trends upwards in the long-term, it is quite volatile from one year to the next. If you plan to use your money in less than five years, then it’s safer not to use the stock market.
In short, if you need the money within a year to make your purchase, stick with a high interest savings account. For lengths of time of one to four years then a term deposit or GIC is ideal. For periods of time longer than that, a conservative investment like a mutual fund might be worthwhile.
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