Banking may seem like an enchanted maze one must go through to discover the magic formula to building wealth. With numerous options for savings and chequing accounts it’s no wonder many people feel puzzled when deciding which type of account is right for them.
The trick to organizing your accounts is to focus on the benefits and features of each account “plan”. It’s helpful to match those benefits and features to your financial needs and habits. When you purchase a cellphone plan, there are different options available for minutes, long distance, data etc., it’s a similar concept when it comes to banking accounts. Focus on the features and benefits vs. your needs and you should be on your way to successful banking!
Below are the types of accounts offered and their best uses and features.
- A chequing account is for your day to day transactions, paying bills, making purchases, transfers and more
- Similar to a cellphone plan, banks offer different types chequing plans which vary in benefits and features
- When choosing a plan consider the amount of transactions you use monthly, the monthly fee you are willing to pay, and the type of transactions you make (ATM withdrawals, bills payments, transfers, wire payments etc.)
- Chequing accounts rarely offer a decent interest rate or any at all, therefore consistently keeping a high balance on the checking account is not recommended
- Students are encouraged to have a student checking accounts, many banks offer a free student chequing account with unlimited transactions
- There are mainly 2 types of savings accounts – short term (day to day) and long term
- Short term savings account offer a few transactions a month- these are usually meant for short term savings such as vacation, upcoming bills, rent etc.
- Short term savings accounts are likely to have a fairly low interest rate
- An example of a short term savings account is an Every Day Savings available at TD Canada Trust
- Long term savings account are meant for long term goals, such as savings on a downpayment, education, dream vacation etc.
- Long term savings accounts usually offer a slightly higher interest rate and offer 0 to 1 monthly transactions
- An example of a long term savings account is a TFSA -Tax Free Savings Account (Canada)
- An RSP (Retirement Savings Plan) is a registered retirement plan, it is essentially a savings account for retirement
- Contributions to an RSP are tax deductible within your annual contribution limit
- RSP contributions are meant to be withdrawn in retirement, the contributions are subject to tax when withdrawn and are reported as income on your annual tax return
- The RSP account may be invested in various ways: you can invest the RSP account in:
- mutual funds
- GICs (Guaranteed Investment Certificates)
- or simply keep the contributions on a simple RSP savings account
- A Tax Free Savings Account is a registered savings account which allows for tax free interest or capital gain
- Similar to the RSP, the TFSA may be invested in:
- mutual funds (what are mutual funds?)
- savings account
- The interest gain received from the account is not subject to tax, for example $1000 in your TFSA was invested into mutual funds and there was a $100 gain from the investment, this $100 gain would be tax free
- The TFSA does have a limit to how much can be invested, currently it is up to $5500 per person per year, this limit is cumulative to previous years as of 2009, which means if you haven’t contributed to the TFSA in prior years you can get caught up, up to $33,000 (current limit as of 2015)
- The TFSA is only available to residents of Canada who hold a valid Social Insurance Number (SIN)
What do you need to open a bank account?
- Photo Identification (usually 2 pieces)