3 ways to protect your wealth

* This article is sponsored by EQ Bank

If you’re like most Canadians, the amount of risk you can take when it comes to saving for the future depends on how far off your future is. The longer you have to save, the more risk you can afford to take on.

Even if you’ve still got plenty of time, recent economic trends may have prompted you to take a second look at the level of risk in your portfolio. Persistently high inflation and stock market volatility are playing havoc with people’s savings, and many are seeking safer options to protect their nest egg.

If you’re aiming to protect your wealth, consider using these three tools to reduce your overall risk while still growing your savings.

 

1. Guaranteed investment certificates (GICs)

When financial markets are going sideways, GICs don’t even blink. This makes them an excellent choice for protecting your wealth when you’re concerned about losing money.

This ultra-low-risk investment vehicle works by locking in your money for a fixed period of time (the “term”) and paying back an agreed-upon amount of interest when the term is up.

GICs are a great option for reducing risk in your portfolio without giving up the opportunity to grow your savings. For example, if you’re approaching retirement age and want to protect your capital while still earning some interest, GICs may be a good fit.

GICs have a few key strengths that make them ideal for protecting wealth, including:

• Guaranteed returns. When you invest in a GIC, you know exactly how much money you’ll get back and when. Everything is decided up front, so you can essentially set it and forget it.
• Variety of term lengths. If you don’t want to lock in your money for a prolonged period of time, you can get a GIC with a term as short as 30 days.
• High interest rates. GICs are keeping pace with climbing interest rates, which means you’ll get a better return on your GIC investment than was possible for a long time.
• Federal government backing. When you invest in GICs with a CDIC member financial institution, eligible deposits are insured for up to $100,000 per depositor, per category. With the backing of the Canadian federal government, it’s virtually impossible to lose money investing in GICs.

2. Tax-free savings accounts (TFSAs)

Since 2009, Canadians have had the option to invest their money in a tax shelter called the tax-free savings account. The TFSA allows you to deposit and withdraw money with relatively few rules, and without incurring any taxes. Each year, the federal government announces the annual TFSA dollar limit, which is indexed to inflation and rounded up to the nearest $500. (For 2022, the dollar limit is $6,000.) Unused contribution room carries forward, but be mindful of your contribution limit—there are hefty penalties for exceeding it.

The key benefits of TFSAs for protecting wealth include:

• Lots of investment options. You can use your TFSA to hold a number of qualified investment types including low-risk options like GICs and bonds.
• No tax on investment earnings. If the investments in your TFSA make money, you get to keep every penny of it without paying capital gains tax.
• Withdraw anytime. There are no penalties or tax implications for withdrawing money from your TFSA, so you can take your money out whenever you need it—and you get to keep the contribution room, which you’ll regain the following year in addition to the new annual dollar limit.

 

3. Hybrid savings accounts

Hybrid bank accounts are a relatively new development in Canada. Combining the benefits of a high-interest savings account and a no-fee chequing account, hybrid accounts let you earn interest on your savings while making it easy to access and use your money.

For example, the EQ Bank Savings Plus Account has a comparable yield to a high-interest savings account. It also lets you send free e-transfers, make bill payments with no transaction fees, deposit cheques using an app, and move money to and from your other accounts.

One thing you usually can’t do with a hybrid bank account is make direct payments at a point of sale, which can easily be made up for with a no-fee credit card.

The wealth-protecting benefits of hybrid savings accounts include:

• No fees on regular transactions. Unlike traditional savings accounts, a hybrid savings account typically lets you move money in and out, send e-transfers and even pay bills with no transaction fees and no monthly fees.
• Higher interest rates than most other bank accounts. Many of the chequing accounts (and even savings accounts!) offered by Canada’s Big Five banks pay little to no interest. By contrast, the EQ Bank Savings Plus Account pays 2.00% interest on every dollar in your account (at the time this article was written).
• Keep better track of your money. With all of your money in a single account, it’s much easier to keep track of your savings and spending. You can even have your paycheque deposited directly to your hybrid bank account and earn interest on every dollar you have on hand.

 

The bottom line

If you’re looking for ways to protect your wealth during times of high inflation and market turbulence, make sure you’re using the right tools. Look into using a TFSA to grow your savings tax-free, consider GICs for reducing risk in your portfolio, and use a hybrid savings account to earn interest on every dollar you have.

 

Also read:

How to make the most of rising GIC rates

How to combat inflation in Canada

Are GICs worth it? 6 times when GICs make sense for investors