Saturday, April 11, 2015

Saving Options

    We are in a low interest rate environment. The interest of high interest savings accounts is under 1.25%.  This is what the banks consider high interest LOL. So basically an everyday bank account should have 0% or very close to it.  With inflation, you are actually losing money as inflation is around 3%.  Guaranteed Investment Certificates, or GICs, pay very low interest as well. The interest rates on GICs is pretty similar to high interest savings accounts.  GICs is the canadian equivalent of CDs in the United States.  Also, the interest paid by these accounts or investments are taxed at marginal rate in Canada which is equivalent to ordinary (earned ) income in the United States.

 What Other Options Do Savers Have?

  First of all, I do believe an individual should save an adequate emergency fund by having easy access to this money. Then a saver has to look for more options to get a little return on their money.

After the emergency fund is completely funded, an investor has some options which are as follows:
  1. Purchase an dividend ETF
  2. Purchase a bond ETF
  3.  Buy physical gold or silver
  4. sell deep out of the money put options
     Option 1 is to purchase a dividend ETF. This is most beneficial if you have commission free ETFs with your broker.  A regular dividend ETF, that is not exposed to leverage, can pay a distribution greater than 3%.  The distribution will be more tax advantageous than an interest payment as the distribution should consist of dividends and return of capital. So, if savers can buy ETFs exposed to stocks commission free , this will be a way to get a yield.  Please note that the ETF stock price can move up or down just like regular stocks.
     Option 2 involves purchasing a bond ETF.  Like I mentioned above, purchasing a bond ETF is most beneficial when it is commission free. Some brokers have commission ETFs while other brokers don't. The distribution payment would consist of mostly interest and return of capital. The disadvantage of the bond  ETF as compared to a dividend based ETF, is the interest from a bond ETF would be taxed at a higher rate.  The advantage of a bond ETF is that price of the ETF remains relatively flat over long periods of time.  Currently I am doing something in my TFSA with a bond ETF, whose ticker symbol is CBO.

      Option 3 consists of buying precious metals like silver and gold. These two assets are physical assets and do not provide income.  An investor, or saver has to hope the price of the asset goes up from when they brought it. An investor, or saver, could also buy an ETF that is exposed to silver or gold which doesn't have a leverage component to it.

       Option 4 involve selling deep out of the money put options.  The investor will be paid up front a premium. Although the premium will be small, it is still cash flow that will likely be greater than what you get in interest form a savings account. In order to  this without having debt, an investor should build up enough money besides the emergency fund to to able to do this.  There is always a chance that the option could be assigned and you do not want to have to be in debt to do this effectively.

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

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