What Should I Do With Short-Term Savings Right Now?

Cash has been piling up in Canadians' bank accounts since the onset of the pandemic. You may be wondering, are there any good options for my short term savings right now?

Central banks have worked to keep interest rates low since the pandemic began. The idea is that low interest rates encourage businesses to borrow money to keep staff, invest in projects, and keep the economy growing. This has been good news for people who own stocks and bonds, and generally the strategy has allowed businesses at large to keep going and even thrive.

Unfortunately, low interest rates aren't great for short term savers and conservative investors. High interest savings accounts and GIC's, the trusty partners of the saver, don't offer many great options right now.

Here are some considerations for people who have cash to save right now and are looking for some/any type of return.

Unfortunately, there are no silver bullets here. The higher return that you want to pursue, the more risk that you need to take. Here is the list of options going from least risky to most risky for short term savers.

1. High Interest Savings Accounts

High interest savings accounts interest rates at most of Canada's major banks are at or below 0.5% per year. If you are up for opening a new account at another bank, you can explore options at some of Canada's online only financial institutions. Some of these banks are offering higher rates, some as short term promotions, to attract clients. The benefit of these options is that high interest savings accounts can be cashed in at any time. If you have an emergency, or you simply want to park some cash for an emergency account, high interest savings accounts are the best option right now.

2. GIC's

GIC's (Guaranteed Income Certificates) offer a fixed interest rate for fixed timeframe. You can get higher interest rates in GIC's, particularly if you are prepared to lock your funds in for more than 1 year. The downside of using GIC's is that your funds are locked in. Once a GIC is purchased it is difficult to cash it in early without facing significant penalties. GIC's are an ok option for people who can afford to take the liquidity risk. If you have a stocked emergency fund, or you have a financial goal that you can match to the term of your GIC (ie. a car purchase 2 years from now), GIC's are still a good option here.

3. Short Term Bonds

A short term bond fund can provide higher returns than GIC's or High Interest Savings Accounts. Unfortunately, particularly for a bond fund, returns are not guaranteed. Short term bond funds can deliver negative returns over short time frames. It is possible that a short term bond fund can give you a higher rate of return than a GIC or high interest savings account. And, a short term bond fund can be cashed at any time. But, given how low yields are on short term bonds, it is likely not worth the risk given the alternatives that are available.

4. Stocks

Stocks are a great option for long term investors. But, if you have a short term or near term principal goal (ie. a big purchase), stocks are absolutely out of the question in my opinion. I add this one to the list because it can be appealing to put money in stocks during a time when stocks have done well (like the last 12 months). You do ok if you put short term savings into stocks. Markets do tend to rise more often than they fall. But, the risk that you need short term money at a time when stocks go down sharply in value is just too high to take.

5. Recommendations

For anyone who has cash that they want to set aside for a short term need, I think high interest savings accounts are the best option at the moment. Ultimately, they give you the most "optionality". You can cash them at any time. If better short term investment options come along, you can switch to those fairly easily (ie. if rates rise and GIC rates improve).

Ultimately, the potential upside of trying to get higher returns involves too much principal risk (short term bond option) and liquidity risk (GIC option) to make either of those options a good idea right now.