Savings Account - Millionaire on the Prairie

A Gift For You – A Step-By-Step Plan for Your Money in 2024!

There’s only 1 week left until we say “Welcome!” to 2024. My gift to you this holiday season is a step-by-step plan for your money. As always, take what you want and leave the rest.

First off, I want you to open atleast 3 bank accounts. Each of these will have a very specific purpose. You can add more if you want, but you need atleast three.

First Account – Your Chequing Account

This is the account that will be the center of your financial life. You will deposit your paycheque money into this account. You will deposit your tax refunds into this account. If you get birthday money, it will go into this account. In case I’m not being clear, all of your money will flow into this account.

Next, all of your automatic transfers will flow out of it. These are the transfers for plumping up your emergency account and for sending money to your investment accounts, aka: the Care and Feeding of Future You accounts.

Once the automatic transfers have been completed, you can spend the remaining money in your chequing account however you see fit. As you know, I’m not a fan of budgets.

If you see a need to budget whatever’s left over after your transfers have gone through, then more power to you.

Second Account – Your Savings Account

This account will hold your emergency fund. These are the funds that you will rely on in a true emergency, which I’ve defined as the loss of your income. If your paycheque goes away, then you will use the money in your emergency fund to pay for your life until such time as you get another paycheque.

How much should you have in your emergency fund? Well, I’m quite traditional on this subject. I think you should have between 6-12 months of take-home pay in your emergency fund. If you can replace your paycheque quickly, then it’s okay to have closer to 6 months of take-home pay. However, if it would take you longer to replace your income, then aim for the higher amount.

Don’t expect that building an emergency fund is going to be easy or quick. It’s simple to create one. After all, the only thing you need to do is set aside money from every paycheque and then not spend it. However, as we can all agree, it’s not always easy to keep our mitts off a growing pile of money.

Easy or not, you still need to do it. Set up an automatic transfer from your chequing account to your savings account. Make it for $100 (or whatever amount you can reliably handle) and send that money to your savings account every time you get paid. The higher the amount, the faster you fill your emergency fund.

Trust me when I tell you that absolutely no one in the history of the world has ever complained about having too much money during an emergency.

Third Account – Your Investment Account

This is the account where you’re going to invest money for Future You. As I’d mentioned above, Future You is still going to want food everyday and warm place to sleep once you’ve stopped working. You owe it to your future self to start investing for tomorrow.

By now, you know the drill. Set up an automatic transfer from your chequing account to your investment account. I would advise that the transfer amount be atleast 20% of your net, take-home pay. If you’re under 25, then it can be 15%. And if you’re older than 25, aim for 30%. Again, if you can’t hit these targets right now, then set the automatic transfer amount for whatever you can afford. Then, work up to the target percentages as your income grows and as your debts are paid off.

You can hold your investment account with your current financial institution, with an online brokerage, or with an investment company. In the interests of transparency, I hold my accounts with an online brokerage where I do a single trade, once a month, to buy more units in my exchange-traded fund of choice.

Once your transfer goes through, do not leave the money sitting around. Invest it! The only way to make your money grow is to invest it. I recommend exchange-traded funds for the following reasons:

they’re less expensive than mutual funds and offer the same level of diversification;
they’re way less risky that picking individual stocks;
they allow you to invest in hundreds of companies at once and in different countries; and
they permit you to benefit from dividend re-investment plans immediately.

When you go to buy exchange-traded funds or mutual funds, pay attention to the management expense ratio. You should never be paying more than an MER of 0.40% without a damn good reason. MERs paid to someone else are money that is leaving your pocket. The higher the MER, the less money that you have invested. The MER shouldn’t be the only reason that you pick an ETF or a mutual fund, but it should be a factor that’s given a lot of weight when you decide where to invest your money.

Next, your ETF or mutual fund should have a DRIP feature. The dividend re-investment plan is one of the tools that’s going to help you stay invested. You see, at first your annual dividends are going to be very small. Think dollars… or cents. But within 2-3 years, you’re going to be receiving hundreds and then thousands of dollars on an annual basis. With a DRIP, those dividends are automatically re-invested while you, Dear Reader, are spared the temptation of spending them. The dividends don’t land in your investment account. Instead, they promptly re-invested before you ever get a chance to consider withdrawing them and spending them.

Finally, keep investing no matter what. The pandemic taught many of us that the stock market can plunge deeply within the span of a few weeks. And 2022 was no picnic either for investors. Even today, the Talking Heads of the Media are expending a lot of chinwag on “the recession”.

Listen.

No one knows when the recession will get here, how long it will last, nor how bad it will be. The only thing that they can all agree on is that it won’t last forever. When the recession is over, the stock market will start going up again. It’s what the stock market does, and what it has always done. If you’re not invested, then you won’t benefit from the stock market recovery.

So invest. And stay invested. Do not stop contributing to your investment account. Transfer your money to this account and continue to invest your money so that it can grow. Future You will thank you for doing so.

Additional Accounts – Your Sinking Funds

These accounts are where you will accumulate funds for both un-sexy stuff (car insurance, annual property taxes) and irregular payments that make your life better (travel, theatre subscriptions, concerts, fine dining, etc…)

In short, you will prioritize your short-term goals and set aside money to pay for them. I can’t tell you how much easier it is to pay may insurance premiums when I know that there’s money sitting in a bank account just for that purpose. The same goes for my annual subscription to Broadway Across Canada, my vacations, my property taxes, etc, etc, etc… You get the drift. If a certain item or service has made it onto my priority list, then I have an account set up to pay for it.

You should do the same. Sinking funds force you to allocate money to the things that are most important to you getting closer to your dream life. And one of the keys to a dream life is not having to worry about how to pay for the things that you want.

That’s the Plan.

Those are the steps. Everything else is a detail. I admit that it’s not glamorous, nor particularly snazzy, but I can assure you that this plan works. I’ve been following it for most of my adult life, and I’m pretty satisfied with the outcome. I’ve made mistakes along the way… many mistakes… but sticking to this plan for my money has tempered their impact on my financial life.

Go for the Low-Hanging Fruit!

This week, I made a slight tweak to my savings account and it will result in my savings account earning 12.5x as much interest as I was earning before.

Yes – you read that correctly. I will earn 12.5x more interest by making one small adjustment to my automatic transfers.

At the time of this post, Tangerine savings accounts are paying 0.10% per annum. EQ Bank is paying 1.25% on its savings account. And lest you think that Tangerine pays the least amount of interest, have a gander at the Big Navy Blue Bank’s interest rates – 0.005%, and that’s if you’re in the right account. Otherwise, you might earn a big, fat 0.00% on your savings!

Let’s be clear. There is no way that I can possibly convince you that 1.25% is a fantastic rate of return. Even I think that 1.25% is a paltry interest rate for a saving account. Yet, the fact remains that 1.25% is 12.5x higher than 0.10%.

So I made a change that will earn me more interest. For the past decade or so, I’ve had an automatic transfer to Tangerine. Longtime readers will know that I’m a huge fan of automatic transfers. When I get paid, I send a chunk of money to my savings & investing accounts. I rely on the power of automation to do so. Up until this week, the automatic transfer whisked money from my daily chequing account and over to Tangerine.

A few days ago, I made the choice to switch my automatic transfer to EQ Bank. I’m still hiving off the same amount of money as before. It’s just going to a different location. And the higher interest rate at EQ Bank means that my money will compound faster. For the record, I’m not saying that it will compound very fast. I’m simply enjoying the fact that it will compound faster at 1.25% than it will at 0.10%, or at 0.005%!

Take a few minutes to look at the interest rate you’re earning on your savings account. If it’s less than 1.25%, then what’s stopping you from setting up an account at EQ Bank?

I understand why a lot of people hesitate to make investing decisions. There are so many options, and no one wants to make a decision that might result in the loss of hard-earned money. Some people would characterize those decisions as “mistakes.” I prefer to think of them as “learning opportunities.”

Switching to bank that pays a higher interest rate is not an investing decision that should paralyze you. You should find out if the financial institution is insured by CDIC. CDIC stands for Canadian Deposit Insurance Corporation. You can read more about CDIC here. In short, should a bank that is CDIC-insured go under, your savings account is insured up to $100,000. Do not keep your savings in banks that are not CDIC-insured.

For the record, EQ Bank is CDIC-insured and so is Tangerine. On that front, they are equals. Tangerine does not limit the size of your accounts. EQ Bank will accept your deposits up to $200,000. (I’m still trying to determine if that’s $200K per customer or $200K per bank account. After all, I did buy a lottery ticket this week and I’m feeling lucky.) Both banks allow you to have up to 5 sub-accounts under one customer number, and each sub-account can get its very own nickname.

In my humble opinion, both of these online banks are fantastic options for pursuing both short-term and medium-term financial goals. By using nicknames on your sub-accounts, each bank’s dashboard reminds you of your savings goals every time you log in. Personally, I’m saving for non-sexy stuff like property taxes and insurance premiums. Yet, I’m also saving for splurges that make life a little more comfortable – renovations to my home, spa days, satisfying my wanderlust. Your nicknames will reflect your goals and priorities.

When it comes down to brass tacks, I’m voting with my dollars. EQ Bank has a higher interest rate so my money will go there.

This is low-hanging fruit. Your money should be working as hard for you as you do for it. Put inertia to work for you. Spend the few minutes it takes to set up your savings account and your automatic transfer. Don’t stand in your own way of earning more interest. Once the transfer is set up, you need not tamper with it until such time as you hear about a CDIC-insured bank paying more than 1.25%. And if you do hear of such a mythical financial institution, do be kind and share that info with the rest of the class.

Right of Offset

Over the past few weeks, I’ve heard people talking about the right of offset. As I understand it, the bank who lends you money has the right to take money out of your bank account, held at the same bank, if you don’t pay your debts on time.

Wait! What? Start from the beginning, Blue Lobster…

Allow me to paint you a picture. Let’s say that you have an outstanding loan at Bank A for $7,500. And you also have a bank account at the same bank with a balance of $3,500. We can call this $3,500 your emergency fund. Or it can be your hope-to-one-day-get-on-a-plane-again fund. Call it whatever you want. The point is, this $3,500 is money in an account held at Bank A.

Right now, we’re living in COVID-19 times. You have to prioritize your money since your income has been cut or eliminated. Maybe you’re one of the lucky ones who still has a steady paycheque coming in on a regular basis, but you’ve heard rumours of layoffs at your place of employment. You wisely choose to spend your money on shelter, food, and utilities. And maybe you’ve decided to cut certain expenses from your budget in an effort to save money. You may even have chosen to not pay your loan right now.***

*** To be extremely clear, I am not advocating this course of action. I think this option causes more problems than it solves, but you know your circumstances far better than I do. Go forth and handle your money however you think is best in your situation. ***

Let’s say Bank A notices that you’ve stopped making payments on your loan. They also see that you have money in an account at their fine institution. Bank A chooses to offset your debt with the money in your bank account. Again, the bank to which you owe money has the right to take money out of your account to pay your debt. It’s the right of offset, and its application stings!

Blue Lobster, is there anything I can do to stop my bank from taking my money?

Of course there is. The first method to prevent the bank from exercising the right of offset is to make your loan payments on time. Prevent your bank from ever wondering about your capacity to repay your debt. Banks like to get payments so pay them.

The second method is to move your bank accounts to a bank where you don’t have any loans. For example, you can move your $3500 to Bank H. Your money will be there when you need it. Of course, you will still owe the debt to Bank A and you should do everything in your power to pay off that loan.

Again, I’m going to be annoyingly explicit about this point. Moving your money to Bank H doesn’t eradicate your debt obligation. You still owe $7,500 to Bank A. Moving your money simply eliminates the risk of Bank A taking money out of your account to satisfy your debt if you stop paying your loan.

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Weekly Tip: Do what you have to do so that you don’t pay bank fees. For the vast majority of people, this means opening an account at an online bank. There are free bank account out there. If you’re still paying bank fees, it’s because you’re choosing to do so. Make a different choice and keep those fees in your own pocket. Use them to buy stock in the bank instead.

Crunch Your Own Numbers

We are just over a week into a new year – hooray! I hope that 2020 is off to a great start for all of you.

What I love about this time of year is crunching my numbers. I track all of my expenses in two self-created spreadsheets, one for my monthly fixed expenses and one for my daily variable expenses. I add the monthly numbers together to figure out exactly how much I spent in the past year. Then I figure out how much cash my portfolio produced, whether dividends or capital gains. Finally, I determine how what portion of my annual expenses are covered by my portfolio’s cash flow.

For the first time ever, my portfolio covered 54% of my annual expenses. I was thrilled at this discovery! I’ve been building my portfolio since 2011. In only 8 short years, my portfolio has grown enough to cover all of my fixed expenses and a portion of my variable expenses. I’m not financially independent just yet, but I’m definitely headed in the right direction.

Know Where You Stand

Between you, me and the fencepost, you should crunch your own numbers too. It’s always smart to know where you stand with your money. How much are you taking home every month? How much is spent on your necessities – shelter, food, clothing – vs. how much is spent on the nice-to-have’s like Netflix, cable, eating out? If you have a portfolio, how much money did it passively create for you in the form of dividends & capital gains?

As a grown-up, you’ve got goals for your life. If real life were like cartoons and other TV shows, you could achieve all of them them without worrying about money. The reality is that money is often needed to achieve life’s goals.

So it’s up to you to crunch your own numbers. If you don’t, then how will you know if you’ll have the money to build the life that you want? Are you really satisfied with relying on hope to ensure that somewhere, somehow the money will land in your pocket so that you can pursue your your dreams?

Net Worth = Your Assets – Your Liabilities

Knowing your net worth is important too. If you want to see your net worth go up, and trust me when I say you do, then you need to know your starting point.

To figure out your net worth, do the following.

Add up your financial assets.
Subtract your financial debts.

Voila! The resulting number is your net worth.

To be clear, in my opinion a vehicle is not a financial asset unless you use it to make money. Non-income-producing vehicles depreciate in value every year and they cost money in terms of insurance, maintenance and gas. In other words, non-income-producing vehicles siphon money out of your wallet on a very consistent basis. As such, I’ve never understood how they can be viewed as financial assets.

On the other hand, a vehicle loan is definitely a debt. There’s no confusion on that point. If you had to borrow money to obtain your vehicle, then you most definitely have a debt, and debts are a factor that decrease net worth.

Track Your Expenses

Crunch your own numbers by tracking your expenses. You might find that what you spend on coffee in a month or in a week is enough to buy stock in the coffee company. Again, buying stocks – also known as investing in equities – leads to earning dividends and capital gains. Look at it this way. If you cut your expenses, you can increase your financial assets by using that money to increase your RRSP, your TFSA, and/or your investment portfolio. The invested money would then kick off capital gains and dividends for you.

Ideally, you’d choose to reinvest your dividends for years and then use the dividends to fund your retirement. However, I’ve heard it rumoured that some people spend their dividends as soon as they get them! Scandalous!!!

Hope is Not a Reliable Financial Plan.

Let’s say that you want to save money for the down payment on your next home. How much did you put towards that goal last year? How much do you intend to put towards that goal this year? Have you set up your automatic savings plan to dedicate money to your house fund? Are you tracking your expenses to identify which ones can be eliminated so you can pursue your goal?

Maybe you want to start saving 10% of your income for retirement. In order to do so, you need to know how much already spending and on what. Is your money already being spent on the survival expenses? Or are you ready to give up your $250 monthly cable habit to find the money to fund your retirement?

The new year is young! Take some time to do the following two things:

Figure out where you want your money to go. What priorities are most important to you right now? Are you satisfied with how much of your money is being directed towards your priorities?
Create a method for tracking where your money does in fact go. Are you satisfied with how your money is spent? Do your spending choices get you closer to or further from your priorities?

You are the person who benefits the most when you crunch your own numbers. When you are familiar with your own numbers, then you’re better able to determine how and why to spend the next dollar that comes into your life. You improve the odds of attaining and creating the life that will make your heart sing.

Ask yourself the following and be brutally honest in your response: Are you really and truly satisfied with working hard just so you can waste your money on things that don’t get you closer to fulfilling your hopes and dreams?

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Weekly Tip: Cook at home more often than not. Thanks to the wonders of Google and YouTube, any recipe that you could possibly want is online and someone, somewhere has made a video of themselves preparing it.

Plant Your Money Tree

“Daddy, can I have some money?” asks a 6-year old Blue Lobster.

“Sure – let me go pick it off the Money-Tree,” Daddy replied, in a tone I can now identify as sarcastic.

“Wait! What? There’s something called a Money Tree?” Little Blue Lobster thinks to herself. “I need to get one of those.”

And that, Gentle Readers, is when the wheels started turning…

Every tree starts from a seed. Your money tree is no different. The seed is your first nickel.

I read an interesting article this week about the distinction between “rich” and “wealthy”. Apparently, rich is when your have a high income. You can do what you want so long as the money continues to roll in. Once the money stops, so does the status of being rich. Rich is living a paycheque-to-paycheque lifestyle but the paycheques are simply much bigger. By contrast, wealthy is a status that is independent of income. Wealth is achieved when you have a cash flow sufficient to fund your lifestyle without having to work. You can work if you want to but you have sufficient assets to fund your lifestyle when you’re no longer enchanted with paid employment.

You can’t get wealthy without first having some money. In other words, you’ll need to find a seed in order to plant your money tree.

Step 1 – Get an income

I don’t mean to be an ass but I want to be exceedingly clear. You will need some kind of income in order to acquire the money to be invested at a later step.

How you make this income is entirely your choice. You can work for someone else, or you can be self-employed. It matters not whether you’re chained to a desk, or a digital nomad, or sitting on your couch to earn an income.

All that really matters in this step is that you have found a legal way to acquire money.

Got an income? Great! Now set up at least two bank accounts – a chequing account for your day-to-day living expenses and a savings account for the money that will be poured into your investments. This is the money that is going to feed your money tree for many years to come.

Again, to be perfectly clear: an empty savings account is utterly useless.

Step 2 – Set up an automatic transfer

Your automatic transfer is one of the most important tools in your arsenal if you want to become wealthy. This tool is second only to having an income when it comes to ensuring your money tree thrives.

Ideally, you will set up an automatic transfer to move at least 15% of your income into a savings account.

Is 15% too much right off the hop? Okay – start with less. You know your numbers better than I do. Start small and commit to working your way up to 15% as soon as you possibly can.

Do you want to save more than 15%? Then go for it! Pick whatever amount you want, so long as you won’t be required to use credit to fund the rest of your life.

In my perfect world, I’d already be saving 50% of my income but, alas, I’m not yet able to do so.

Step 3 – Plant your money tree

Learn about the various ways to invest your money.

Your money tree is meant to create cash flow for you. You’re going to be investing for a long time. In the beginning, you feed your money tree and, then later on, your money tree will feed you.

There are so many investments to choose from. I use exchange traded funds and index funds. They’re less expensive than mutual funds and they invest in the same equity markets.

Never invest in anything that you don’t understand. Don’t let anyone talk you into investing your money if you don’t understand the risks and volatility of the proposed investment.

Once you do find an investment that your understand, get your money into it as fast as you can to give your money tree as much time as possible to grow big and strong.

Step 4 – Keep learning about investments

Why are you surprised by this step?

I hate to break it to but your learning doesn’t stop just because you’ve invested some money. You have a responsibility to Tomorrow You to do the best you can to ensure your money tree is properly planted in fertile soil. The better your investments are, the better your money tree will grow.

Twenty years ago, I was huge fan of guaranteed investment certificates (GICs) because they are paying more than 5% interest. Woohoo! Guaranteed money – how could that be a problem?

It was a problem because inflation was more than 5%.

The purchasing power of my money was decreasing every day that my money was locked into my GICs.

As soon as I learned about inflation and purchasing power, I started investing in mutual funds. I knew they were more volatile but I also knew that their higher long-term returns would likely outpace inflation. Mutual funds would protect the purchasing power of my money.

And then I learned about exchange traded funds and index funds. They would deliver the same or better returns than mutual funds. ETFs and index funds would be volatile too, but I already knew that I could live with that. They offered the same benefits as mutual funds but at a fraction of the price.

So I started by investing in dividend exchange traded funds. I love the monthly cash flow. Lately, I’ve made a tweak to my investments in that future contributions will go towards a global equity fund.

If you don’t know where to start, might I suggest Quit Like a Millionaire by Kristy Shen & Bryce Leung and The Simple Path to Wealth by J.L. Collins? (I am not getting paid for endorsing these books.) Both books are easy to read and they lay out the concepts of personal finance in easily-digestible chunks. You won’t go wrong if you follow the path laid out in either of these books.

Step 5 – Grow your money tree.

Here’s where the steak starts to sizzle.

The more money you save to invest, the faster your money tree can grow.

Ignore the talking heads in the media. They don’t know the future – recessions are normal – daily gyrations of the stock market don’t matter very much when you’re investing for decades.

Step 6 – Repeat steps 3-5

Unless you’re ridiculously lucky, it’s going to take a good long while before your money tree is producing enough of a cash flow to fund your life.

Until that day arrives, you owe it to yourself to save a portion of your paycheque for the purpose of investing. You also owe it to yourself to continue learning about the various investment options that are out there.

You can do this, but your money tree won’t plant itself. Instead of waiting for some mythical “right time” to begin, plant your money tree today.

The TFSA Isn’t Just for Savings

Go back and re-read the title until it’s burned into your brain.

A Tax Free Savings Account – TFSA – is a wealth creation tool. So long as your money is under the tax-repelling protection of the TFSA, then the government will not tax your money. The second thing to remember is that the government also will not any money that’s withdrawn from the TFSA.

When the government decides not to tax your money, then you’d better sit up and pay attention.

The TFSA is not just for savings!!! It’s enraging that the Canadian government gave one of the best investment vehicles of all time a name that causes so much confusion. The name leads people to think that savings is the primary use of this magnificent wealth-creation tool.

Believing that the TFSA can only be used as a savings account is wrong.

Why do people think the TFSA is a savings account?

The word “savings” is part of the name of the account. Including this word in the name has caused a great many people to assume that this account is simply a savings account. The government did a disservice to the populace by not calling this a Tax Free Investing Account.

From this moment forward, when you think of a TFSA, I want you to only think about which money-making investment you’re going to stuff into it. Do you want something that churns out dividends every single month, a la an army of little money soldiers? Or would you prefer to buy growth stocks that results in juicy capital gains when you sell them? Perhaps you’re just looking to invest in index funds, mutual funds, exchange trade funds (ETF), or a real estate investment trust (REIT)?

The Tax Free Savings Account is not just a savings account. Any investment that can go into your registered retirement savings plan (RRSP) can also go into your TFSA. Once your investment is inside the TFSA, any and all investment returns will grow tax free.

The other tasty cherry on this particular sundae is that all withdrawals from your TFSA are tax-free as well. Did you happen to invest $5000 into stock of the Next-Big-Thing within your TFSA and that $5000 is now worth $750,000? Well, my friend, I’m happy to tell you that you can withdraw that $750,000 from your TFSA completely tax-free.

Yes – that’s how good a Tax Free Savings Account really is.

Higher tax-free returns are a good thing.

Investments in equities are more volatile, but they have a long-term historical average return that is much higher than anything you’ll get at the bank. Let’s say you decide to buy an index fund that invests in the stock market and you’re going to hold it for 10+ years. Based on historical averages, that investment should return around 8% if held. In other words, so long as you don’t panic during the ups-and-downs of the market and you don’t sell, your investment should return around 8% at the end of those 10+ years.

Find yourself a nice little compound interest calculator. Enter 8% return, a 10-year time period, and the amount of capital that you plan to invest. Write down that number. Now go back to the calculator. Enter the 0.5% return your savings account will pay you, a 10-year time period, and the amount of money that you plan to keep in a savings account. Write down this second number.

I think you’ll find that earning a higher return over the same period of time means that more money will stay in your pocket. Remember that your money will grow without being taxed if you put your investments inside your TFSA.

Consider Using a TFSA for Long-Term Investing

Hopefully I’ve convinced you to look at the TFSA in a new light. If so, yay for me. If not, then so sad for you. The TFSA is a gift – check out this articulate, ascerbic article from Garth Turner of Greater Fool if you don’t believe me.

And it’s a shame that people aren’t taking advantage of it.

To those who’ve been persuaded that the TFSA can help them build wealth, I say the following:

Create a balanced portfolio of investments.***
Put this balanced portfolio inside your TFSA.
Leave the portfolio alone to grow tax-free inside your TFSA.

***What’s that, you say? You don’t know how to create a balanced portfolio of investments? Well, don’t fret. There are ways to learn how to do it. I suggest that you start by reading Garth Turner’s blog – Greater Fool – and learn for yourself. (I am not being paid for mentioning his website.) Remember – you don’t need to pick the perfect portfolio. You need to create a portfolio that you understand: some equities, some bonds, some cash. Those are the three magic ingredients that will bolster your chances of creating some serious wealth for your future needs.

Don’t let analysis-paralysis prevent you from starting to use the TFSA as it was should be used, as a vehicle for you to invest your hard-earned money and to watch it grow tax-free. The TFSA isn’t just for savings!

Do not use your precious TFSA room as a way to shelter money that is earning a very low rate of interest. Bank accounts are for holding short-term money. Long-term money needs to be put into investments. Wherever possible, your long-term investments should be protected from the ravages of taxation.

Higher Interest, No Fees!

This week, I opened a new bank account at EQ Bank. (This is not an affiliated link. I will not get paid if you click on it.) This bank pays its customers higher interest than the other banks. The added cherry on this sundae is that this bank will not charge you bank fees.

I check my bank balances every day. It’s habit that soothes me. I like to know how much money I have, and how close I am to meeting my financial goals. I have different accounts for different purposes: emergency savings, travel, home maintenance/repair, vehicle replacement fund, retirement savings, fun money. Each account is dedicated to a particular financial goal. Thus, I’m able to pay cash when it’s time for me to spend my money on achieving each goal.

(For the record, I bank at several institutions. It’s my slightly irrational belief that it’s best to spread my money around. If one of them goes down, then I’m not completely screwed by losing access to every single penny beyond what’s in my wallet. And if all the banks go down at the same time, then that means the extra-terrestrials have landed and I’ve got other things to worry about!)

Last week, for a lark, I decided to find out how much interest I was being paid on each of my savings accounts… When I found out the posted rate for one of my savings accounts, I was not amused.

One of my banks was paying me 0.010% per annum… No, that’s not a typo. They literally only pay 1/100 of a percentage point for balances over $1,000. For balances less than $1K, the bank pays 0.005% per annum.

WTF?!??!

Instead of getting mad, I decided to be proactive. I could have railed against the “greedy banks”, but why? Being enraged about interest rates offered by the banks has never resulted in those rates going up. I realized that there was no need to be angry or upset. It was easier and less stressful to simply solve the Problem of Low Interest Rates by moving my money to another bank.

The question then became, which one?

TLDR – I found a bank with higher interest, no fees.

Enter EQ Bank.

You may be asking yourself how EQ Bank earned the privilege of being the repository of my emergency funds. For starters, EQ Bank pays a rate of 2.30%, regardless of the balance. No matter whether it’s a dollar in the account or $200,000 in the account, I’ll earn 2.30% on my money. That minor detail certainly caught my attention.

Secondly, EQ Bank doesn’t charge its customers bank fees. For the uninitiated, you should know that I don’t pay bank fees as a general rule. Back in the Stone Age, before e-transfers became common, I might have purchased a draft or a certified cheque. Fine – an occasional hit to the pocketbook for something out of the ordinary. I didn’t like it, but I could tolerate it.

Paying bank fees month-in-and-month-out? To make my own deposits, my own withdrawals, transfers & utility payments?

Uh, no thank you! I have options, like banking with Tangerine and Simplii Financial. (Again, these are not affiliated links. I will not get paid if you click on them.) These are two of the best-known online banks in Canada. Their interest rates are higher than the brick-and-mortar banks, and they don’t force you to pay monthly bank fees. I’ve been banking with them for years.

However, EQ Bank pays a higher interest rate than both of them. If you want to get technical, EQ Bank’s rate is 2X higher than that of the other online banks at the time of writing this post .

Do Your Own Research

In the eternally wise words of a very dear friend, don’t be a Dum-Dum.

If you decide to switch banks, then read the information on your chosen banking institution’s website. The information is there so read it before you make any decisions. It’s your money so you have to be responsible for it.

Once again, for the cheap seats in the bank, EQ Bank offers you higher interest with no fees. For those still in doubt, trust me when I say that 2.3% is more than 0.010%.

If you’re satisfied with the rate your bank is paying you on your money (and you shouldn’t be if that rate is less than 2.3%), then do something about it.

Like I said earlier, you’ll earn 2.3% at EQ Bank even if you only have $17.58 in your account. And who could argue with that?

How many bank accounts do you need?

One of the smartest things I’ve ever done with my money was to learn how to separate today-money from tomorrow-money. Today-money is the stuff that gets you from one day to the next – it’s the money for groceries, for your shelter, for your transportation, for your charitable donations. Tomorrow-money is the money that you will need to buy those very same things when you’re no longer earning a paycheque.

If you’re going to retire at some point in time, you’ll need to save some of your today-money so that it becomes tomorrow-money. I know that sounds simplistic but it’s one of the most fundamental tenets of personal finance – if you spend all of your money today, then you won’t have any money tomorrow.

So, let’s avoid that eventuality – no one should ever strive to be old and poor. It’s not charming. The first step to avoiding impecuniosity is to figure out the answer to the following question: How do we accumulate tomorrow’s money?

It starts with an income and a bank account. You need to have money coming in and you need a place to keep it. If you’re getting paid, you need a bank account to receive money from your employer. I’m going to assume that you have a chequing account and that from your chequing account, you pay your rent/mortgage, your utilities, your vehicle payment, your student loan payment, your credit card payment, and any other payment that you’ve agreed to pay. Chequing accounts are great for day-to-day living expenses. They are perfect for today-money, which is the money that you need to spend today in order to live the life you want.

You know what chequing accounts are not good for?

They’re not good for tomorrow-money. It’s a very rare person who can keep a nice float of money in their chequing account without finding some way to spend it on a day-to-day purchase. Maybe family’s visiting on the weekend, or a road trip with friends is in the works. Whatever the temptation, tomorrow-money doesn’t have a shot in hell of surviving and thriving in your chequing account.

Enter the savings account. You’ve heard of living below your means. That phrase means that if you’re earning $1000 each week, then you’re only living on $900 each week. Your means is the $1000, and you’re living below your means by only spending $900. The difference between your earnings and your spending is your savings, which in this case would be $100. So where to put the $100 of savings that is going to eventually burn a hole in your pocket? Where do you put the money that isn’t spent?

The $100 is sent to your savings account. It goes into your savings account and is not spent on the day-to-day expenses of running your life. The $100 is your seed money to fund your retirement. The $100 is tomorrow-money and your sole goal for this money is to make it grow.

So how do you make it grow? That’s simple too! Every time you get paid, you transfer money from your chequing account, where the today-money lives, into your savings account, where the tomorrow-money lives. And then you do not withdraw the money from your savings account. You must commit to not using this money. It is savings, which means it is sancrosanct – it is not to be touched!

I can already hear your next objection – what if I have an emergency and I need to use the money in my savings account?

Again, the answer is simple. You’ll have a second savings account that’s for emergencies. You will continue to live below your means while you build up your savings account to a pre-determined amount of money. Let’s say you will feel best if you have $7500 set aside in your emergency fund. Over time, you will live below your means and you will make transfers from your chequing account to your emergency fund until you have $7500 set aside.

See? It’s a simple process. You get money from your employer deposited into your chequing account. Then you transfer money from your chequing account into your two savings accounts, some money goes into your tomorrow-money savings account and some money goes into your emergency fund savings account. And you don’t ever spend money from your savings accounts. Instead, you live on the money in your chequing account.

The trick to funding your savings accounts is to set up automatic transfers. Trust me when I tell you that 99.9% of the population does not have the discipline to manually transfer money to their savings accounts every time they are paid. You might be one the very few who possesses this divine power, but what if you’re not? Why take the risk? Why not simply set up an automatic transfer and get on with your life?

Automatic transfers always work. Putting automatic transfers in place results in one less chore for you to have to remember to do every two weeks. They ensure that you’re meeting your twin goals of one, creating a pool of tomorrow-money to live on when your paycheque-money stops coming in, and two, setting aside money for those instances when an emergency rears its head.