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The Return of Cash
For the last decade, financial advisors have repeated the same mantra: “Cash is trash.” When interest rates were near 0%, keeping money in a savings account meant you were actively losing purchasing power to inflation. The only way to grow your wealth was to take risks in the stock market or real estate.
Things have changed. In the current economic climate, central banks have hiked interest rates to combat inflation. As a result, the incredibly boring High-Interest Savings Account (HISA) has suddenly become a powerhouse.
What is a HISA?
A HISA is exactly what it sounds like: a savings account that pays a much higher interest rate than a standard checking or savings account.
If you use a traditional “Big 5” Canadian bank (RBC, TD, BMO, Scotiabank, CIBC), your standard savings account is probably earning 0.01% to 0.5% interest. If you use an online-only “challenger bank” (like Wealthsimple Cash, EQ Bank, or Neo Financial), they are currently offering between 4.0% and 5.0% interest.
The Math of 5% Risk-Free
Let’s say you have $20,000 saved for a house down payment.
- Big Bank (0.5%): You earn $100 after one year.
- HISA (5.0%): You earn $1,000 after one year.
That is $900 of completely free, passive income just for moving your money to a different app.
Why HISAs are Currently Beating the Market
The stock market historically returns about 7% to 10% per year on average over a 30-year period. However, in the short term, the stock market is highly volatile. It can drop 20% in a single year.
To earn that 7% return, you have to take on a massive amount of Risk.
A HISA currently offers 5% with Zero Risk. Your money is protected by the CDIC (Canada Deposit Insurance Corporation) up to $100,000. It cannot go down.
The Risk Premium
In finance, there is a concept called the “Risk Premium.” You should only invest in the stock market if the expected return is significantly higher than the “risk-free rate” (the HISA rate).
If the stock market is volatile and only expected to return 6% this year, but a HISA guarantees you 5%, it makes absolutely no sense to take on all that stock market risk just to chase an extra 1%.
When to Use a HISA
You should not put your 30-year retirement savings into a HISA. Over 30 years, the stock market will still win.
However, you must use a HISA for:
- Your Emergency Fund: (3-6 months of expenses).
- Short-Term Goals: (Buying a car next year, a wedding in two years, a house down payment in three years).
If you need the money in less than 5 years, it does not belong in the stock market. It belongs in a HISA where it can grow safely at 5% without the risk of a market crash wiping out your wedding budget.