Banking Overhaul

Photo: aiesec.ca

Photo: aiesec.ca

I like doing business with my bank, and when Rom arrived in Canada, I recommended he deal with them too. Recently, however, he’s been getting better services and products than I have! What gives?

The answer: Although I review my investments with an advisor once a year, I had not reviewed my basic banking since I set up my accounts in 2002. My spending and savings habits have changed a lot since then. So have the options offered by the bank. I am a little disappointed that my advisor at the bank never thought to (or chose not to) review my basic banking with me. It’s kind of like Internet and cable service providers – it’s only when you threaten to cut your service that they offer you a better deal! In my case, I compared all the products on their web site and made an appointment to get them all changed. Over all, I really do like both my financial advisor and my bank. I use two branches where the staff know me, and go out of their way to serve me well. Therefore, I didn’t shop around to all the major banks. I just need to stay informed and not go with the defaults. In an ideal world, their customer service would be more proactive.

Here’s a rundown of my accounts with Scotiabank. For readers outside Canada, you may not recognize the account types and investment vehicles, but you’ll see my attempts to reduce fees and increase yields! For Canadian readers, my aim is not to promote my bank (this is not a sponsored post) but to promote consumer education.

Chequing Account Change: from Power Chequing to Scotia One

Chequing Account / BEFORE: There was an ever-changing minimum balance to waive the monthly fee; limited free transactions per month; and any transactions over the limit had a fee of $0.90 each. This account type is obsolete and is no longer offered to new customers, which is why Rom was offered a new account type before I was!

I appreciated a no-fee account, but the number of free transactions was so limited that I went to all-cash spending to avoid using my debit card.

Chequing Account / AFTER: The choices were a rewards/points program, a cash-back program at 1% (capped at $300/year), or a no-fee account. I chose the latter – with a minimum balance of $3500, the monthly fee of $12.95 is waived, and there is no limit on the number of transactions.

I keep at least this amount in my chequing account as savings toward insurance, vacations and gifts, so this was a no-brainer. My account is now completely fee-free and I can use my debit card any time.

Savings Account Change: from Power Savings to Momentum Savings

Savings Account / BEFORE: Again, I maintained a high enough balance to receive monthly interest. The interest rate kept going down until it was negligible despite the high balance. It is currently 0.4% for balances over $5000.

With a balance in the thousands for this Emergency Fund, it seemed foolish to let it sit there with so low a rate.

Savings Account / AFTER: The choice was my old account type, which allowed unlimited no-fee withdrawals and had the 0.4% interest rate, or an account with a 0.75% interest rate, with another 0.75% bonus for each 90-day period with no withdrawals. By changing over, I raised my interest rate from 0.4% to 1.5%.

I have to decide how “untouchable” this money should be. Ultimately, losing the 0.75% bonus probably won’t be a significant factor if I have an emergency expense to pay. All the interest on this account is taxable. I put the allowable maximum into my TFSA (see below) and only keep the excess in a taxable account.

I had two products inside my TFSA (Tax-Free Savings Account): cash and GICs (Guaranteed Investment Certificates). As the balance grew, I had to decide whether to make higher-risk investments inside the TFSA. As the name says, all the growth inside the TFSA is tax-free.

TFSA Change: from free (unassigned) cash and GICs to Savings Accelerator Account

TFSA Cash / BEFORE: Like the savings account, cash in the TFSA earned only 0.4%.

Meanwhile my investments in mutual funds last year earned 3.4% and 4.6% after management fees.

TFSA Cash/ AFTER: Instead of holding free cash in my TFSA at 0.4%, I opened a savings account inside the TFSA, which earns 0.9-1.0%, the best rate available at my bank for cash within a TFSA. (There is a temporary rate of 1.5% for 3 months).

GICs (Guaranteed Investment Certificates) / BEFORE: This is a safe, low-yield investment inside the TFSA. They are available in terms of 6 months to 5 years. As with everything else, the rates kept going down, and most recently, I had to lock in at 18 months to get just 1.5%.

GICs / AFTER: My one remaining GIC is locked in until May, so I will need to make a reinvestment decision then, or leave it in cash. Since the rate will be 1% if I just stick it into savings, there is no point in getting another GIC – the 18-month rate has now gone down to 0.95%!

NEW: I took a risk and invested a chunk of TFSA money in products with risk. My retirement funds are in mutual funds and they have performed well over a 10+ year period, so I decided to take a chance. Kerpow! Between December and January, the stock market took a big dive and I lost 6.7% of the principal on that portion of my TFSA! Luckily I didn’t put all my eggs in one basket. Meanwhile, I had decided to put an amount of “play money” into a trading account so I could experiment with buying ETFs (Exchange Traded Funds). Because of market performance, I haven’t made any trades. So I haven’t lost anything on that portion yet! Logically, when the market is low, it’s the right time to buy. Sure doesn’t “feel” right, though.

Finally, I made a credit card change.

Credit Card Change: Scotia No-Fee Visa to Momentum Infinite Visa

Credit Card / BEFORE: I had a no-fee card and paid off the balance every month. The card had no perks.

Credit Card / AFTER: I qualified for a cash-back Visa card that refunds 4% on groceries and gas, 2% on drugstore purchases and recurring bill payments, and 1% on everything else. It has an annual fee of $99 (first year refunded) and $30 for a second card for Rom. There are additional perks such as travel insurance and car rental discounts.

The new credit card is the biggest change for me. It now pays to use the credit card for everything, to get the cash back. Since I never carry a balance, this is not an evil temptation for me. I have had to read the fine print and do a lot of calculations. The refund level depends on the “merchant code” of the store I buy from. For example, Sobey’s and Superstore use the merchant code for grocery stores and qualify for 4% back. Wal-Mart is not classed as a grocery store and so only qualifies for 1% cash back. If the groceries at Sobey’s and Superstore cost a few percentage points more than Wal-Mart, I am not saving any money, and I should not allow myself to be lured by the cash back. I have started a new Price Book, and I now stock up on non-perishable groceries at the lowest price of all the stores in our area. I continue to buy what makes sense at Costco and our local produce market, neither of which takes Visa. I will also have to be careful when I travel, and check what exchange rate I am getting if I use the card (as with any credit card). Incidentally, I had to be very deliberate about turning down the credit insurance, which I don’t need.

One thing I am considering is buying gift cards for other stores while I am at the grocery store. Everything purchased in a grocery store qualifies for the 4%, not just food. So I could buy gift certificates to clothing stores, hardware stores, restaurants and so on. However, I will only buy them when I specifically need them, and not stock up in anticipation!

I trust myself to keep things in perspective. For example, If I purchase airfares for $1000, I will get $10 cash back. That is $10 I wouldn’t have earned on my old card, but not enough to make me go silly with unnecessary spending. There will be no problem accumulating benefits far in excess of the annual fee, but how much remains to be seen.

Well, at this point it seems that all of my efforts will only help to compensate a little for my mutual fund losses! Perhaps by year-end, things will have turned around. If not, I suppose I am getting a little more interest, and lower fees, on all the rest.

Do you review your bank services? Have you changed banks (or credit unions)? Or do you use a mix of products from local and online banking services?

15 comments

  1. My spouse and I share accounts. We currently utilize the services of both a bank and a credit union, with 2 checking accounts and 3 savings accounts between them.

    The way our credit union accounts are structured, there is a “share account” (savings) required, and the minimum balance ($10) maintains our ‘share’ (buy-in) at the credit union. It does not pay to keep additional funds in the share account, because there is no interest earned on it. However, we opened ancillary savings (essentially all our accounts are linked there, under our member number), which *does* earn interest (very low, like .05%). We tend to “save toward” – for major purchases, travel, expected medical expenses, etc – so this is a good fit, in that it’s easily accessible, account funds can easily be transferred between account types, and I don’t stress about taking the money out when we need it for our “save toward” purchases, yet I feel I’m getting *something* in return (small though it may be) for allowing them to keep my money.

    I’m not sure whether Canadians have the same IRA structures as we do in the U.S., but I’ve started looking into investment savings here. I have a traditional 401(k) that is maintaining its value (I still have what I invested, regardless of the dips in the market), but I am trying to figure out what good a money market account might do me, and am considering opening a Roth IRA.

    My husband has been out of work for several months now and may be going through a medical separation from his job. He has a state retirement plan, and one of the things we need to do is figure out how that whole system works: whether it’s accessible early under the circumstances, whether he can roll it over, etc. It’s a bit of a stressor.

    • Hi Mrs. F, I agree that your credit union accounts make sense because even though the interest is minimal, you can move around your money however you like. We don’t have the same named retirement products in Canada (401k, IRA and Roth IRA). Any individual can start an RRSP which is most similar to an IRA. You only pay the tax when you withdraw the money in retirement. Our TFSAs are more like a Roth IRA in that you pay the tax on the income up front, and it accrues its gains tax-free. Good luck with your spouse’s transition from work and all the financial implications.

  2. This is one area that I think I will require a lot of help in – particularly because I am new to Canada and everything is different. In England you never pay for a bank account or transactions – that was a big kicker for me!

    • Yes, it is hard to believe that we give the banks our money so they can earn profits on it, and then they charge us fees for every possible way in which we access our own funds! I shouldn’t recommend anything for you since you’ll want to do your own research, but PC Financial through Superstore offers completely no-fee chequing and savings accounts which are super-basic. The interest rates are currently 0.1% and 0.8%.

  3. Mutual funds are wise in the long haul, even when the market tanks, as long as you are at least 7 or 8 years away from needing to withdraw from them. My mutual funds have gone through several boom and bust cycles, but if you hold on they will go back up and grow and I am glad I have just held onto them and not done a lot of re-adjusting.
    What you do need to do is to start thinking about when you plan to (if ever) draw money out of the system (because of my pension and Social Security I can delay this until the mandatory age to withdraw) and then plan to move at least a good chunk into more secure bond accounts.
    You want to be able to avoid “spending down” your mutual fund account when it is losing money – that is what makes people panic.

    • I completely agree with you, Jamie. I originally lost money on my first mutual funds after the 2001 crash and again in 2008 but both times it rebounded better than ever. So I have no intentions of pulling money out. I make some minor adjustments in the proportions to fixed income and growth. Like you, I can wait until the mandatory withdrawal age.

  4. Jamie

    We have accounts with 6 different institutions. They all offer something different.

    One is a local bank. We like having this because it gives us the opportunity to do things like bank a cheque in person, easily deposit change, etc. We can also purchase ETFs through this bank.

    We have accounts with a few online banks. They offer cash back rewards, bonus interest rates, etc. The offers change regularly, so we need to keep on top of this. For the second half of last year we were receiving 5% cash back from one bank, now their offer has changed to a increased interest rate on their savings account. But I didn’t know about this new rate until I checked their website to see what their latest offers were, and I didn’t receive it until I phoned them to ask for it to be applied.

    We still have the same credit card we’ve had for the last 12-13 years, despite it being bought out by a different institution. It has a low rate (around 12.95%, though we pay it off each month), no annual fee and 55 days interest free. I’ve only seen one other institution offering a comparable deal in all the time we’ve had it. I’ve heard from other users that the bank is trying to switch people over to a different option that has an annual fee. I’m thinking we will apply for the comparable card with the other bank, as a safe guard in case the first bank withdraws their offer.

    I can’t think of any bank fees we’ve paid in the last 10 years. All of our cards offer us enough transactions, and I don’t think there is any charge at all for using EFTPOS (the machine at the shop) or B-Pay (paying bills online through the bank website) no matter how many times I use them. Once in that time I accidentally paid our credit card bill late and were changed a $35 fee, but we called them and they waived it as it was a one-off event. None of our accounts have monthly fees, or a minimum balance required. But I have heard of other banks in Australia requiring these things. I’ve just worked to avoid them.

    • A couple of years ago, I was paying as much as $10-15 a month in bank fees despite having high balances. I was only able to reduce that by making fewer transactions. In my case, it would have been easy to get fed up and switch banks, but all of the free accounts at other banks have extremely low interest, no rewards, etc. It was discouraging that my bank has better products it didn’t offer to me, and I had to find out about them by myself. I should probably buy shares in my bank because it is so profitable 🙂

      • Fiona

        Oh, no! I am so sorry about your TFSA money, Dar. I really hope I didn’t write any glowing posts about our self-managed super that month that might have partly influence you to experiment more.

        Back in 2008-2010 I saw our retirement funds making continual negative returns and just didn’t know what to do. Then we switched to self-managed funds on a rising market and made a few years of really great returns (20% +).

        But since November, we’ve ‘lost’ a really large sum of money. I know it is just equalising out to historical averages so I’m just choosing not to log-in and check on a daily basis. In Australia, we legally can’t access our retirement till age 65, which is decades away for me. So I am trying to keep that really long-haul perspective. Just annoyed though that I voluntarily put more than the minimum in last year and in retrospect, would have been better to go off the mortgage.

        On the banking side, we really benefitted from going in to see our Branch Manager a few times about a year ago. We ended up getting so many things set up in a more efficient way. He really talked us through our long-term plans and found products that matched. Our bank is on a marketing bent about being ‘local’ and for locals, so they contacted us for the review initially. I was really pleased with the service and interest savings in the end. All very time-consuming though, isn’t it!

      • Hi Fiona, No worries about the self-managed bit. I only set aside a small amount of “play money” for that and haven’t invested it yet; it’s still sitting in cash. The mutual fund purchase was in the works for a long time and I don’t regret it. All of my other funds have performed well over time and recovered from the troughs. The review process was time consuming, but one afternoon of research and one banking appt is not too much to ask! Especially ending up ahead by having no bank fees, gaining interest and cash back.

  5. HollyH

    Costco is changing over to accepting Visa sometime this spring, at least in the US. So there may an opportunity to use your cash-back card there too.

    I am easing into figuring out what banks and services I want and need now that I am alone and no longer providing for an ailing spouse. For now I have bits parked here and there for various reasons, including points back and no fees!

    • I had read that Costco was taking Visa in the US, but I am not sure about here because they have their own branded Master Card and they may have an exclusive contract with them. Yes indeed, time for you to recalculate your financial future. Now that is a chore, but I am sure you are up for it! All the best.

  6. I used to have a lot of bank accounts with multiple institutions and then I simplified. It’s amazing how motivated one can be when you don’t want to pay bank fees. 🙂 I kept one brick and mortar bank and 2 online ones. And life has been much simpler.

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