Easy Ways to Protect Your Hard-Earned Dollars

We are all focused on building a better life for ourselves and our families through stronger financial planning and sound budgeting. For most of us, that means a lot of work put into stretching every dollar as far as it goes and getting the best return possible on our investments.

Today I’m going to focus on an aspect of financial planning that doesn’t get enough attention: deposit insurance. After all, there’s no point in building up a nest egg if it’s not there when you need it.

After your plan has been put in place and you’ve made a decision about how much of your net worth to put aside in savings, what exactly should you do with it? From high interest savings accounts, to GICs, to RRSPs, there are plenty of options available for your savings. Deposit insurance is provided for only certain kinds of savings, so it is important that you keep it in mind when making sound financial decisions.

Related: RRSP’s The Need To Know Basics

Canadian banks are safe and protected, but failures aren’t impossible

Many countries have a government agency or other body responsible for protecting savers in the unlikely event that a bank goes bust. Here, the Canada Deposit Insurance Corporation (CDIC) provides free and automatic insurance against bank failure of member institutions.

Although we haven’t had a bank failure in Canada for over twenty years, other countries have recently suffered from the collapse of some of their banks and international financial markets are more intertwined every day.

Some of my family and friends back in the UK still have bad memories of the Northern Rock bank run in 2007. So the question is, even though Canada’s banks are very stable right now, what reasonable steps can you take to protect your savings while you continue to grow your net worth?

Has a Canadian bank ever failed?

On June 4, 1996, about 2,600 Canadians discovered that they couldn’t access their savings with Calgary-based Security Home Mortgage Corporation. This financial institution had gone bankrupt and simply closed up its doors overnight. A total of $42 million in savings was at risk. Imagine if the hard work you had put into socking money away in GICs and other savings was suddenly taken away!

The news must have sent a shiver of fear through each and every person who had trusted this bank with their hard-earned dollars. Fortunately, this failed financial institution was a member of CDIC. Within a span of three weeks, CDIC made payment of all insured deposits. Not a single dollar of insured savings was lost.

How does deposit insurance work?

CDIC’s deposit insurance protects a wide variety of savings, but not everything. To begin, coverage is only provided at banks that are members of CDIC. Most large banks and even many regional banks in Canada are members. A full list of eligible banks is available on CDIC’s website.

Once you’ve checked to see if your bank is a member, you’re not done yet. The system is only meant to protect savings and so does not apply to many investment products. Things like mutual funds, stocks, bonds, or other securities are not covered. It also does not cover foreign currency accounts. So that US dollar account you opened to make your last family vacation easier may have its benefits, but deposit insurance is not one of them.

What is protected are things like chequing and savings accounts, GICs with a term of less than five years, and cash deposits or eligible GICs that you hold in RRSPs, TFSAs, and RRIFs. In fact there are seven categories of eligible deposits. Each eligible deposit category is automatically covered up to $100,000. Coverage is automatic, so you don’t have to apply and there is no fee.

That means that there are plenty of ways to protect your savings, so it’s best to speak with your financial advisor and make a plan about how much of your net worth to keep secure and where to save it. To ensure you are armed with all the facts, go to cdic.ca.

How to maximize your protection

If you are fortunate enough to have built up a significant net worth, there are some important considerations to keep in mind when deciding how to structure your savings. As I mentioned in my last net worth update, we are currently keeping nearly $175,000 in cash and emergency savings, and over $280,000 in pensions, RRSPs and TFSAs.

As I always say, “it’s not about how much money you make, but how you save it”. While my mutual funds and some other investments are not covered by CDIC, we have used a number of strategies to maximize our protection for cash savings and GICs.

Related: What would you do with $100,000 in Savings?

I am definitely focused on generating the best return possible, but I also make an effort to keep my savings protected where I can. I would like to share some of these strategies with you, so that you can apply them to your own situation.

If your deposits are in a variety of investment vehicles like RRSPs and TFSAs — you may be eligible for more than the $100,000 maximum. Here’s how it works.

Under CDIC rules, eligible deposits are protected for a maximum of $100,000 per separately insured category, per member institution. These separately insured deposit categories are:

• Deposits held in one name;
• Deposits held in more than one name;
• Deposits held in trust;
• Deposits held in an RRSP;
• Deposits held in an RRIF;
• Deposits held in a TFSA; and,
• Deposits held for paying taxes on mortgaged properties.

Eligible deposits within each of the categories are insured separately by CDIC, up to the $100,000 maximum. That’s also the case for joint accounts, meaning you and your partner combined could be insured for an additional $100,000 above the coverage on your individual accounts. For deposits held in trust, CDIC can insure up to $100,000 for each beneficiary. So each individual named in a trust may be eligible for up to $100,000.

So in planning your investment strategy, consider placing your savings in different separately insured vehicles to maximize your CDIC protection.

For example, here’s how CDIC insurance would apply to Mr. Saver and Mrs. Saver, who bank at a CDIC member institution:

Mr. Saver’s portfolio:

• Personal chequing account: $50,000
  Unregistered chequing and savings accounts both fall under the category of deposits held in one name. Deposits in this category are added together and covered up to $100,000.
• Personal savings account: $45,000
  Unregistered chequing and savings accounts both fall under the category of deposits held in one name. Deposits in this category are added together and covered up to $100,000.
• RRSP: $20,000 in one-year GICs, $130,000 in mutual funds
  GICs are covered if they mature in five years or less. As these GICs are placed in Mr. Saver’s RRSP category, they are insured separately from his other accounts up to $100,000.
  Mutual funds are NOT covered
• TFSA: $10,000 in a savings account, $5,000 in municipal bonds
  Eligible deposits, such as savings accounts, placed in the TFSA category are also covered separately from other accounts up to $100,00.
  Bonds are NOT covered.
  Mr. Saver is CDIC insured for $125,000

Mrs. Saver’s portfolio:

• Personal chequing account: $50,000
  Unregistered chequing and savings accounts both fall under the category of deposits held in one name. Deposits in this category are added together and covered up to $100,000.
• Personal savings account: $75,000
  Unregistered chequing and savings accounts both fall under the category of deposits held in one name. Deposits in this category are added together and covered up to $100,000.
• RRSP: $150,000 in mutual funds
  mutual are funds NOT covered
• TFSA: $15,000 invested in telecom stock
  stocks NOT covered
  Mrs. Saver is CDIC insured for $100,000

Mr. and Mrs. Saver’s joint assets:

• Joint savings account: $160,000
  Unregistered joint savings accounts are covered up to the $100,000 limit.
  Mr and Mrs. Saver’s joint assets are covered for $100,000

Total Coverage

The above scenario shows how CDIC deposit insurance can cover your deposits for over the $100,000 limit within the same member institution. Through both their separate and joint accounts, these smart savers are covered for a total of $325,000.

Estimator to help with your savings plan

CDIC has also developed an online estimator that can be helpful as you decide where to place your savings. You can select member banks, type of deposit and category and receive a quick and easy estimate of your coverage.

Simple ways to protect your savings!

Now you know how to keep your savings protected, so that you never have to experience the stress that so many people did during the Northern Rock collapse in 2007 and other bank failures before and since. The rules of CDIC coverage can be complicated at first, but after going through a few examples you should be able to find an easy way to keep your savings growing and keep them safe!

Post Contribution: This post was done in partnership with the CDIC in order to bring you accurate information about deposit insurance.

Are You New To Canadian Budget Binder?

• Check out my new Free Recipe Index
• Get my FREE Excel Budget Spreadsheet and all my Free Money Saving Lists!
  
• You can now have full access to my Ultimate Grocery Shopping Guide in Canada.

Related articles

• Paying rent Am I wasting Money? 
• To take or not take early CPP
• Can you picture yourself living the retired life?
• Parents happy retirement on hold until son moves out 
• How I Support My Family On One Income
• A beginners guide to early retirement 

Photo Credit: Piggy in Bank Safe- FreeDigitalPhotos.net/StuartMiles

Save

Save