This is the latest installment of our “Ask Wealthsimple” series, where our financial guru Dave Nugent helps you navigate the world of investing.
I'm going to lead with my major reservation here. The idea of a savings accounts seems a little antiquated to me. I’ve got a checking account. I’ve got investments. Why do I even need a savings account?
Let's start with an example. Do you know about the idea of an emergency fund?
Let's pretend I don't.
When I do a portfolio review with a client, one of the first things I recommend is to keep enough cash (or cash equivalent) to keep you going between three and six months, in case some emergency happens. Like if you or your spouse lose your job. If that happened and you, for instance, were forced to live on credit cards, the interest might be so crippling it'd be hard for a lot of people to recover.
The perfect place for an emergency fund is savings.
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But why? Shouldn't I just put that money into — hmm, where did I hear this phrase before — a low-fee diversified portfolio, like the world's smartest investors?
Investment accounts are for longer-term investments. There's risk involved in them, and one thing that decreases risk is time. An emergency fund should be there if you need it.
It’s a good rule of thumb that if you’re going to need money within three years, keep it in either cash or cash equivalent. Some people think a checking account is a smart place to park that cash. But you earn no interest. That's where a good savings account — where you’ll actually be earning a little bit on your money — comes in. Of course, I'm partial to our product, Wealthsimple Smart Savings, because you'll be earning a pretty high rate.
OK. So when I have my emergency fund in savings, am I done? Do I ever have to put more money into savings again?
Savings is a smart place to stash any money that you're going to need in the short-term. Money for a down payment on a house you want to buy, money you're planning to use for a vacation. A lot of freelancers I know need to make quarterly payments on their taxes — savings is perfect for that.
I'm a freelancer but I’ve always used a kind of faith-based approach on paying my taxes. I pray to God I have enough money in my checking account to pay my taxes when they’re due. Why not keep the money in checking?
Saving the money in your checking account is dangerous because you're using that account all the time. On the other hand, hopefully you don't take money out of your savings account day to day to pay bills. So you're less likely to spend your tax money on, say, groceries and find yourself behind the eight ball come tax day.
I’m Googling as we speak. There are some places that seem to offer really high interest rates for savings.
I’d read the small print on any ads you see online. A lot of those advertised rates are introductory or “teaser” rates. They're designed to bring you in and then three months later, or six months, or what ever it is, the rates will go down to almost nothing.
A lot of these banks also require minimum deposits of $5 or even $10,000. And then you'll have your money in all these different places and will need to move it around constantly to find the next teaser rate.
When I was a kid I felt comforted by the fact that the bank branch where I kept my money had a little FDIC decal on the door, meaning that my savings was guaranteed by the government. You guys don’t have any branches so you don’t have any decals. No decals, no guarantees, right?
There are absolutely guarantees. The money you put into Smart Savings is SIPC insured up to $500,000.
Do I get one of those passbooks? Those also remind me of my childhood. Can you guys whip up one of those for me?
We won’t have a passbook. Sorry. But how’s this: you'll be able to see all your activity — your deposits, withdrawals and your monthly interest — right in the app. It’s even better than a book.
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