October 24, 2018

Stop Wasting Time Looking for Better Short-Term Rates

For merely a decade, Canadian interest rates flirted with historically low levels before the Bank of Canada finally started to gradually raise the prime rate in 2017. Almost immediately, many banks consequently increased their mortgage rates. As expected, they still took a while longer to offer better rates on savings account. So, for an extended period, so-called «high-interest» savings accounts were paying negligible interest.

Competition, especially from their virtual counterparts, now has forced even traditional financial institutions to offer improved rates. But, in the end, does this really matter?

We just don’t think so.

Some people will go out of their way to obtain only half a percentage point more. They will even switch to another institution if necessary. But in fact, we believe those efforts may only translate into just a couple dollars a year even if someone would manage to get an extra 1-2%. Hence, hunting for a better short-term rate will rarely equate to any significant long-term improvement of your financial situation.

By the way, threatening to transfer may still constitute an effective negotiation tactic to obtain similar conditions from your current institution. It won’t cost you much to ask. But, if it comes down to it, a real transfer may prove to be quite complicated and time consuming.

The following chart illustrates the dismal growth of short-term savings. Three factors will influence how much you will accumulate: time, capital and interest rate. For short-term savings, you don’t have any of the three on your side. By definition, you have little time. Capital will seldom be important unless you are saving for instance, for a huge down-payment on your dream house. And finally, interest will be in the 2-3% range at best these days.

So, small amounts invested at a small rate for limited time will result in marginal growth. Then again, that’s perfectly fine because your main objectives for short-term savings should be protection of capital and liquidity.

For instance, tying those funds in stocks wouldn’t be that wise. It’s next to impossible to predict what any stock will do in a short span. That kind of strategy could be very costly if your acquisitions suddenly stumbled. We would qualify it as risky speculation as opposed to much more reasonable long-term investing. 

Because you may need to have access to it soon, it’s normal to park some cash for your short-term needs. We frequently do it in our investing accounts or for our emergency cushion. In those circumstances, a smaller rate of return is acceptable.

Don’t get us wrong, we won’t spit on a few extra dollars if it’s simple to get our hands on them. We just don’t expect to make a fortune out of our short-term holdings and won’t waste our precious time elusively looking for fractionally higher rates. It’s simply not worth it!  

When you think about it, it can be the complete opposite for long-term investing. Over a lengthier period, your dispose of more time where you can engage bigger, more substantial amounts of money. Hence in the long run, a small difference in performance can have a much more prominent impact.

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