Can You Use Your Savings Account To Buy Stuff

We all know saving is important. We also know to put our savings in a savings account. But do we know what savings account to choose? Not so much. No worries, though; as long as you know the basics of banking, you’ll be able to understand how savings accounts work, how your money can benefit from being placed in one, and other important details, like whether you can use it for your spending.

Before we fully dive into the topic, we should clarify one thing: A savings account is different from a chequing account. In general, a savings account will pay a higher interest rate than a chequing account (more on this later), grounded in the idea that you’re less likely to withdraw the money in your savings account, and so your bank will reward you with a higher earning interest rate.

Regardless of this idea, it is possible to make purchases from a savings account, but it will depend on each bank’s rules. Many banks will limit how many transactions you can make with a savings account to still qualify for the high-earning interest.

Why do we have savings accounts?

Banks are in the business of taking deposits from customers and then lending those deposits to other customers who are looking for loans. The bank charges an interest rate on that loan and then gives some of that interest to their customers.

However, for a bank to be able to lend money, there must be a high volume of money in their accounts for an extended period of time. It can’t rely on chequing accounts because customers use them too frequently, and the money is always moving. The solution? Savings accounts.

They’re a win-win-win for everyone involved. Savers get a higher return on their money than they would, keeping it in a chequing account. The bank can trust the money deposited in savings accounts to be stable and consistent. Finally, the borrower can access the loan they need to make purchases like a home or to start a business.

While this brief explanation doesn’t encapsulate all bank processes, it does show us why savings accounts earn more interest.

They’re a win-win-win for everyone involved. Savers get a higher return on their money than they would, keeping it in a chequing account. The bank can trust the money deposited in savings accounts to be stable and consistent. Finally, the borrower can access the loan they need to make purchases like a home or to start a business.

While this brief explanation doesn’t encapsulate all bank processes, it does show us why savings accounts earn more interest.

When should you open your first bank account?

So, when should you open your first bank account in Canada? It really goes without saying that the best time to open up a bank account is right now.

Types of savings accounts

In Canada, there are a lot of options when it comes to savings accounts with varying rewards and interest rates on savings based on the business model and goals of each bank. The options, prices, and rates change frequently, but there are some main structures.

Highest interest savings accounts (HISA)

The savings accounts that offer the highest interest rates are often the most restrictive with money withdrawal. Typically, they’ll cap it at one to six withdrawals per month. If you go past this threshold, you might violate the terms of the account and lose the high interest rate or pay a charge.

Banks will make high-interest savings accounts super exclusive and may even charge a monthly fee. While not common, they may also offer even higher interest rates if you consider depositing more money.

For example, they may increase the interest rate after your first deposit of $100,000. This is called a tiered interest rate structure. Many banks have different rules for each type of savings account, so be sure to understand all of the details before putting money into the account.

For more information, check out our post about the pros and cons of high-yield savings accounts.

Low-Interest Savings Accounts

The lowest-earning savings accounts are the ones that make it the easiest to use the money for daily purchases. They have debit cards, bill payment options, and few limits on pulling money from the account. These accounts pay the least amount of interest to savers, but they do still allow a customer to separate accounts for personal finance savings goals.

Many accounts will come with a monthly or yearly fee, yet they may also offer cash-back options on purchases. For people who are looking to start saving but do not have a lot of income, these accounts can be a good place to start.

The difference between a high-interest savings account and a standard savings bank account

So, what's the difference between a high-interest savings account vs. savings account? A standard savings account is a form of bank account that is tied to your checking account. At its most basic form, these accounts offer a simple way to store money. However, most banks offer extremely low interest on the money you save.

In contrast, a high-interest account is a type of bank account that can offer interest rates much higher than a traditional account, making customers more money on what they deposit.

Okay, so what about the difference between a chequing account vs. savings account? A checking account is a bank account where you can store and withdraw cash using your ATM card for everyday spending, while a savings account is intended for money you want to save for later financial goals.

Current low interest rate environment

While most of this article has explained why savings accounts pay more interest, we’re currently experiencing historically low interest rates in Canada. There are many reasons for the low interest rates, ranging from the COVID-19 pandemic to ample government lending programs that have made borrowing easier for most people. Consequently, there is less need for banks to have more savers.

This probably has you thinking, "How do interest rates affect my savings?" Ultimately, this makes saving and earning interest on that savings relatively difficult. Because of the low interest rates of even the best savings accounts, many have decided not to save but rather invest in stock markets to try and earn more on savings.

While the possible return on savings could be better in markets, investing or trading securities carries risks, and those risks can be much greater than putting money in a savings account. For starters, there is no guarantee that the money invested in securities will grow in value; stocks are volatile and subject to both gains and losses.

With KOHO, you get to earn interest on every penny in your entire account, from your spendables to your savings!

Taking risk into consideration

In comparison to securities, money saved in a savings account is unlikely to be at risk of loss. In fact, a main feature of bank accounts is that most deposits are insured by the Canadian Deposit Insurance Corporation (CDIC) for up to $100,000. Most banks are members of the CDIC, but make sure to check when opening any type of bank account.

It is important to note that the CDIC does not insure against losses due to fraud or theft, mutual funds, or stocks. However, it does protect the saver if the bank faces problems or has to shut down. While this is increasingly rare, throughout most of history, runs on banks were common when it was feared that the bank did not have the ability to pay deposits with enough cash. Fortunately, modern insurance and a network of government systems have eliminated the problems of bank runs.

The importance of saving

It is important to mention that savings are a way to protect against uncertainty in the future. Savings gives the user more options throughout life. Debt, on the other hand, reduces options for a person moving through life.

To illustrate the point, debt is a prediction that you will be able to repay a loan. To predict that the loan will be repaid, a borrower has to make assumptions about income several years and sometimes decades into the future. However, few things ever go according to plan, and that is what makes borrowing such a problem for both people and societies.

Savings creates what is called optionality. Simply having money in the bank waiting to be used gives a person more options. A business opportunity, a home purchase, or the chance to raise a family are all much easier to achieve if there is money saved and ready to be used. So, while interest rates are low now, they will not always be that way. Plus, saving to increase your options in the future will never go out of fashion.

So, if you're thinking of making purchases with savings account balances, we recommend setting aside money into your checking account for everyday transactions rather than taking funds out of an account that is meant to secure your long-term financial health. In other words, you'll want to keep your savings balance untouched until major life events come around, like buying a house, getting married, home renovations, or other savings goals you may have.

Remember, withdraw cash with your debit cards from your checking account for things like bill payments, grocery bills, or if you need to transfer money to a friend or family member following a night out.

Are there alternatives to savings accounts?

Yes, if you still want to streamline your plans for spending and saving, there are alternatives to savings accounts, including the following:

• Investments: If you want to hold onto your funds and make money, investing in the stock market is a great opportunity to make your money work for you without keeping it in an account.

• Real estate: If you have high amounts of cash in your accounts, it makes sense to purchase real estate. Not only can you generate a secondary income with rental units, but you can also build equity in the property, which will help your finances long-term.

• Guaranteed investment certificates (GICs): GICs are fixed-term investments that are low-risk and guaranteed, as their name suggests.

The Bottom Line

The bottom line? Using savings to make daily purchases will cost you in interest. The best way to save is to make sure that you only place money in high-interest savings accounts when you know you won’t need the money soon, so your savings have the opportunity to grow and will be there when you need it.

Beyond saving and spending money, it's also essential that you maintain a healthy credit score with your bank or credit union, as it can help unlock financial opportunities for you in the future. To build your credit with KOHO, get a free credit score check before applying for a virtual credit card that not only allows you to get a cash advance of up to $250 interest-free but also the option to add overdraft protection coverage to ensure you make your monthly payments, even when funds are low!

*Interest rates are per year, calculated daily, paid monthly, and can change at any time without notice.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up-to-date account information!