That's right. If you are looking to save money, the highest interest savings account will not get you there. You might as well call it an emergency fund.
What is an emergency fund?
An emergency fund is an easily accessible stash of money for use only in case of emergency. It is not to be used to buy a toy or a vacation. It is not to be used to renovate your kitchen. It is for use only in case of emergency.
Allow me tell you why Having an Emergency fund and leaving your money in a savings account (even if it's the highest yield savings account) is a stupid idea.
I am normally a very cautious person. I try not to get into debt. (I've been there done the and it ain't pretty. I never want to feel that awful anxiety in the pit of my stomach again. And the debt wasn't even my doing (I will write about that at a later date)
I sold my house and paid off my debts but I still had money left which I put into an ING High interest saving account at the bank. After all, ING gives you the best interest rates for a savings account. At the time it was 1.5% Slightly higher than a regular bank checking account.
(I know, I'm lucky cause I had a house to sell)
Putting it in the bank instead of investing it was to my cautious nature the right thing to do. After all I can't lose the money. It would grow, slowly but it would grow.
It was my emergency fund. Who knows what could happen. If I needed money, it would be there for me. Anyway, I wanted to buy a house. so I needed to stay liquid. 4 years later, I still hadn't bought anything and my interest did grow but it was a joke. my sister was making money hand over fist with her investments. Safe reliable investments that gave dividends. Read more about dividends.
If I had put my money into safe investments instead of a high interest savings account (such as BMO, BCE, Scotia, Fidelity) I would have been making about 5 - 8% a year instead of 1.5%.
Guess what happened?
After 4 years I still hadn't bought a property, so I invested my savings into excellent but conservative dividend yielding stocks. The next day I found a fabulous condo, I bought it. Had to take the money out and lost a little bit in the exchange but I still came out ahead.
But now I have a great property.
So where is this story going you ask? Simple - an emergency fund sitting in the highest yield savings account in the bank is like flushing money down the toilet.
You lose money because the inflation rate is higher than the 1% you will receive, and you have to cut that in half because of taxes. Yes, you get taxed on your savings. You get taxed on investments too but at least they are more lucrative.
Unless you have a gazillion dollars stay away from risk.
Stay in conservative dividend yielding stocks and if you do need money for an emergency, you can always withdraw the amount you need.
If you don't need the money, let it grow.
If you need a bit of money, let it sit in ING at least you don't have to pay fees.
So, in conclusion an emergency fund in a highest interest savings account is not something you need. Investing money you have saved is better. BUT if you have debt - credit card debt, loans, etc… put down money on the debt. you will save more by eliminating credit card debt than you will by having an emergency fund sitting in a low yield savings account.