# Can't continue 'high interest' accounts any longer



## cautiousone (Jun 9, 2009)

Scotia just reduced interest on it's 'high interest' Scotia Power Savings rate from 1% to .75% and that's for $5000 minimum. Their TFSA pays 1%. What are others doing given these extremely low rates?

Naive question, maybe, but what is the strategy behind banks paying clients zilch for their accounts?


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## Sampson (Apr 3, 2009)

Nothing!

We don't have to many options now, and there's no reason to change your asset allocation because one type of asset is not performing as well. Chasing returns is a dangerous game.

The saving grace in these low interest environments is that inflation is low also, so your cash isn't being eaten away as quickly.


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## brad (May 22, 2009)

Sampson is right -- basically you have to view interest rates in concert with inflation rates in order to understand the whole picture. 

The Consumer Price Index inflation rate in April was 0.4 percent. If you're earning 0.75 percent today you're actually making more than you were in the third quarter of 2008 in a high-interest account that was getting 3.5 percent interest, because inflation back then was running at 3.4 percent.


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## HaroldCrump (Jun 10, 2009)

Sampson said:


> The saving grace in these low interest environments is that inflation is low also, so your cash isn't being eaten away as quickly.


I think this is BS that the media and Govt. is dishing out to us.
On the contrary, I think inflation for most common, household items is creeping up on us.
Groceries are more expensive, common wear clothes are more expensive, shoes are more expensive than last year.
Sure, 52-in flat screen TVs, fancy phones and gadgets may be cheaper, but the cost of non discretionary expenses are going up.


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## canadianbanks (Jun 5, 2009)

HaroldCrump said:


> I think this is BS that the media and Govt. is dishing out to us.
> On the contrary, I think inflation for most common, household items is creeping up on us.
> Groceries are more expensive, common wear clothes are more expensive, shoes are more expensive than last year.
> Sure, 52-in flat screen TVs, fancy phones and gadgets may be cheaper, but the cost of non discretionary expenses are going up.


Exactly! Very soon many people wil find out how bad inflation actually is.


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## Sampson (Apr 3, 2009)

HaroldCrump said:


> I think this is BS that the media and Govt. is dishing out to us.


I'm curious to know why you think the media and Govt. would want to mislead the public regarding inflation. I'm not trying to refute whether claims the CPI is low are true or not - but it really sounds like instead of having an issue of how the CPI is calculated you believe the public are actually being lied to.

Part of the issue with the CPI is that it includes energy costs, and with natural gas at $3/KJ, and oil also low (relative to last year) its not surprising they will drag CPI down.

Regarding your specific claims (higher food and clothing prices) - here's a link that shows you are correct! 

http://www.statcan.gc.ca/subjects-sujets/cpi-ipc/cpi-ipc-eng.htm

How inflation/deflation of specific consumer products affects an individual will have more to do with how much is spent in that category. My personal food budget represents at most 5-7% of my total spending - so even if food inflation is at 10% annually, it will have little impact on my overall spending power.

I suppose the important thing is not to read too much into the importance of the CPI. I haven't seen how the CPI is supposed to correlate to actual spending power (i.e. how much consumers spend on each of those categories).


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## HaroldCrump (Jun 10, 2009)

Sampson said:


> I'm curious to know why you think the media and Govt. would want to mislead the public regarding inflation. I'm not trying to refute whether claims the CPI is low are true or not - but it really sounds like instead of having an issue of how the CPI is calculated you believe the public are actually being lied to.


Agreed, to a certain degree.
Perhaps the financial media is more culpable than the govt.
I keep hearing in the media that because inflation is low and deflation is a risk in the near term, we should put up with low returns on savings, we should not expect salary raises, etc.
I know for a fact that some employers (even those companies that are doing relatively fine in these times) are using these stats and commentaries to keep salaries pegged at previous year levels.
You only need to visit your local Wal-Mart or grocery chain store to see how inflation has crept up in the last 1 - 2 years.



> How inflation/deflation of specific consumer products affects an individual will have more to do with how much is spent in that category. My personal food budget represents at most 5-7% of my total spending - so even if food inflation is at 10% annually, it will have little impact on my overall spending power.


Agreed, in my case however, household expenses are the largest component after mortgage.
This includes groceries, clothing, and other general household use items that need to be replenished every few weeks/month.
For such a household, higher expenses with offsetting increase in earned income leads to lower savings.
Since prices of luxury and discretionary items are now lower (cars, fancy electronics, etc.) retailers are making up for lost margins by jacking up prices of daily use products.
The govt. in turn is happy to keep collecting the GST/PST which otherwise would have reduced.


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## furgy (Apr 20, 2009)

> We don't have to many options now, and there's no reason to change your asset allocation because one type of asset is not performing as well.


There are lots of options , they just carry more risk , higher rewards are a reason to change your asset allocation.

I change my asset allocation with the change in markets , I always like to have my money where the best returns are.



> Chasing returns is a dangerous game.


Chasing returns IS the game , again it just requires a little risk tolerance , I have my funds in REIT's paying between 8% and 20% , there's no way I'm going to keep much in a savings account at 1% when returns like that are still available and in my opinon carry little risk.

Even most index funds are better than savings accounts , or how about market or commodity linked PPN's , really no risk to the downside , except you maybe lose out on your 1% interest , but still a chance to profit on any upswing of the economy.



> The saving grace in these low interest environments is that inflation is low also, so your cash isn't being eaten away as quickly


To me that is not a saving grace , if inflation hits 4% then your 1% gains for the previous three years are toast.


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## Agape (Apr 3, 2009)

I've decided to put my savings into a Credit Union that actually pays decent interest without any terms. If you choose the correct locations, you don't have to chase around the highest rates, because you'll already be pretty close as it is. Major banks have a hard time comparing most often.

Currently I'm getting 2% on regular savings and 2.5% on TFSA account, without any terms.

(This is money being saved for a house, so I'm not planning on taking it out for a while.)


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## Sampson (Apr 3, 2009)

furgy said:


> There are lots of options , they just carry more risk , higher rewards are a reason to change your asset allocation.
> 
> I change my asset allocation with the change in markets , I always like to have my money where the best returns are.


I'm not exactly sure the OP is asking how best to determine his personal risk profile. You make many excellent points regarding holding equities vs. cash but without knowing the rest of the OP's portfolio, I tried to keep my suggestions limited to what may happen within his cash portion of the portfolio. Without knowing the overall objectives of the OP, and only knowing he wants to increase the return on a cash holding. If the OP needs that money in 6 months for a down payment on a house, then suggesting to move it to higher risk holdings may not be the best idea.

Personally, I'm a big fan of equities, and my cash and fixed income are quite lacking (about 4%, up from basically 0%).



furgy said:


> Chasing returns IS the game


Chasing whatever is hot in the market may work for some, but my guess is that its a failing strategy for most.



furgy said:


> Even most index funds are better than savings accounts


This was certainly not true over the past year.



furgy said:


> To me that is not a saving grace , if inflation hits 4% then your 1% gains for the previous three years are toast.


I don't believe the OP has his money in a fixed-term GIC so if inflation hits 4%, the BOC will adjust their prime lending rate, and the banks will all increase their prime rates - hence higher returns within the high interest savings accounts. That said, savings accounts will ALWAYS trail since the banks will not want to lose money.

I don't believe the anyone should hold a majority of their portfolio in cash, I'm in favor of the 120-age rule for cash and fixed income, but I do believe everyone should hold some cash. Opportunities always seem to occur when we are low on cash - having some set aside can result in some really significant gains going forward.


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## Sampson (Apr 3, 2009)

HaroldCrump said:


> I know for a fact that some employers (even those companies that are doing relatively fine in these times) are using these stats and commentaries to keep salaries pegged at previous year levels.


Thanks Harold, I'm now understand and also share your cynicism on this regard. I think there are many companies that are doing just fine that use recessionary environments as excuses to keep wages low, layoff workers and other 'selfish' things.


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## HaroldCrump (Jun 10, 2009)

furgy said:


> Chasing returns IS the game , again it just requires a little risk tolerance , I have my funds in REIT's paying between 8% and 20%


Can you please share the symbols you like?
I am starting to look into REITS recently...

Thanks


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## cautiousone (Jun 9, 2009)

As a first-time poster, here, thank you for your comments. I'm seeing a bigger picture. 

This cash is only a small part of my portfolio. I consider the few months' worth of income in this account to be my emergency fund. I want safety, NO risk, and no fees, so figured cash the best short-term strategy.


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## furgy (Apr 20, 2009)

HaroldCrump said:


> Can you please share the symbols you like?
> I am starting to look into REITS recently...
> 
> Thanks


My core holding in REIT's and my favourite is TR.UN , one of the best paying ones as well.

It is actually paying me in excess of 28% considering I loaded up on shares when they were at $1.80.

For someone getting in at todays price of say , $2.30 or so , your return will be about 21-22% , it is a safe distribution in my opinion and one that will be increased soon as the economy picks up.

Rather than steer you to just my REIT holdings , google Canadian REIT,s , 
there is lots of info out there on them.

This link has some good info as well.

http://canreit.com/

Sampson said:



> Quote:
> 
> 
> > Originally Posted by furgy
> ...


You are totally wrong , I said chasing _returns_ , not "what's hot" , if you liken the two as the same and keep your funds in low paying ivestments just to avoid chasing "whats hot" , you will most likely have mediocre returns.

I invest for income and always like to have my money where the returns are.


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## Kinny (Apr 3, 2009)

OMG! Has anyone seen the rates ING is giving out for TFSA!?!? It's now at 3.00%!!!!

What is wrong with you PC Financial!!! I am definitely not a happy camper. Thinking of switching!!...


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## stephenheath (Apr 3, 2009)

Thanks for the heads up! Unfortunately it's too late in the year to make switching too effective ($50 transfer fee, interest savings = $5000 * (3%-.75%) *5 months/12 months = $46.88) but if ING keeps it at that rate I'll be withdrawing it all December 31 and moving it over January 1st, along with next year's contribution!


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## Dave (Apr 5, 2009)

Furgy,

I took a quick look at TR.UN. It is a small REIT with a verry narrow market base, mostly betting on the pick-up of the oil-sands industry in Fort McMurray, Alberta. I do not know much about it, but don't you think that a more diversified REIT would be a better and safer pick ?

Dave


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## Kinny (Apr 3, 2009)

Kinny said:


> OMG! Has anyone seen the rates ING is giving out for TFSA!?!? It's now at 3.00%!!!!
> 
> What is wrong with you PC Financial!!! I am definitely not a happy camper. Thinking of switching!!...


Does anyone know if PC Financial charges you a "transfer out" fee when removing money from the Interest Plus Savings account?

Thanks!


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## stephenheath (Apr 3, 2009)

> Does anyone know if PC Financial charges you a "transfer out" fee when removing money from the Interest Plus Savings account?


If it's not inside the RRSP or TFSA, no. If it's inside the TFSA, then there is a $50 fee to transfer out. Inside the RRSP the last time I did it about a year ago it was $50, but they had mentioned they were raising it, and I can't find what the fee is now on their website.


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## stephenheath (Apr 3, 2009)

This is interesting... I was on the ING website looking all over to see if the 3% was a limited time offer, and there were no details anywhere. But I left it on the main page and if you wait long enough, the animation changes the coffee cups to a 3% rate that says "until October 1st 2009"... leads me to think this is a limited time promotion to get everyone's TFSA there and then it will jump down.

I think this is going to be one of the big weaknesses of the TFSA system. Since you can't move it throughout the year without paying a fee, the only time it will be cost effective to move is near the year end when you can withdraw on December 31st and redeposit on January 1st. I have a feeling this will lead to a lot of good rates then followed by a lot of rate drops once the funds are tied up for another year.


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## brad (May 22, 2009)

stephenheath said:


> if you wait long enough, the animation changes the coffee cups to a 3% rate that says "until October 1st 2009"... leads me to think this is a limited time promotion to get everyone's TFSA there and then it will jump down.


That's correct. You have to careful with ING as they do this kind of tease frequently. I got a 90-day GIC at an introductory rate of 3.5%, and it auto-renewed at something like 0.05%.


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## Liz (May 31, 2009)

brad said:


> That's correct. You have to careful with ING as they do this kind of tease frequently. I got a 90-day GIC at an introductory rate of 3.5%, and it auto-renewed at something like 0.05%.


So this is (probably, at least) a bad idea for people who already have a full TFSA. For those of us who just now have money to put into a "high interest" TFSA, this seems like a good deal, but I wonder if I'm missing a better alternative. Does anyone have ideas/reasons why this would NOT be a good idea for an initial TFSA deposit, or can you suggest another alternative? Thanks!


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## stephenheath (Apr 3, 2009)

I'd say it's a great place to put your TFSA in if you're looking at keeping it liquid... you get 3% until October 1, and even if the rate is lousy after that, it's only for 3 months before you can withdraw on Dec 31 and redeposit on January 1st.. even if they go down to 0% interest you're still ahead overall for the 5 and a half month period compared to PC financial's .75%.


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## brad (May 22, 2009)

The other thing you can do, and which I should have done, is to call ING before your first 90-day term is up and tell them that you want to renew for a longer term (which will get you a better rate but of course your money won't be as liquid...it depends on what you want to use your TFSA for). You can't do that online, you have to do it by phone.

For example, if your 90-day term is up and you want to switch to a 3-year TFSA, you'll get renewed at 2.5 percent. ING posts its GIC rates on its website. The current normal rate for a short-term GIC at ING is 0.5 percent (not 0.05 percent as I mistyped above).

You aren't locked into a 90-day term forever if you buy a 90-day GIC. When your term comes up you can call them and ask to roll it over to a longer-term GIC so you can get a better rate.


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