Why I hate having extra money in my chequing account

I always try to keep just enough money in my chequing account to cover my next months rent and whatever I currently have owing on my credit cards. If I have any more money then that in my account it drives me crazy. You might be thinking I’m a bit off at this point, why would having too much money in your account ever be a problem? Let me explain.

Treating your dollars like employees

If you haven’t read The Richest Man in Babylon, I highly recommend it, it is a bit dated (published in the 1920s) but the parables still hold today. Many of the parables in the book talk about how you should think about your money as employees who you can put to work and use to make even more money. Whenever I look at money sitting in my chequing account earning 0.05% interest I can’t help but feel indignant about how lazy my employees are being. There is literally no excuse for them not to be working harder and making me more money then they are. I would much rather have them toiling away in the stock market, or at the very least in my high interest savings account at Peoples Trust (currently returning 2.5%). The harder my money is working the happier I am.

Example Scenarios

Why don’t we compare a couple of different scenarios and see how putting your money to work can make a huge difference in the long term. For each scenario we will be looking at a hypothetical person with $5000. We’ll move that money around between a few different accounts and see what the returns look like after a year. We will then extend the scenarios and see how they fare after 5, 10 and 25 year periods.

 

Scenario #1 – PC Chequing Account ($5000)

For our first scenario lets look at someone who is keeping $5000 in a President’s Choice chequing account to cover expenses and as an emergency fund.

Yearly Return
Chequing account ($5000 @ 0.05%) $2.50

After a year they would only have earned $2.50 in interest. That isn’t terribly exciting!

Scenario #2 – TFSA HISA Account ($3500) PC Chequing Account ($1500)

Now let’s look at a scenario where someone only keeps $1500 in their PC chequing account and has moved the extra $3500 to a high interest savings account with Peoples Trust

Yearly Return
Chequing account ($1500 @ 0.05%) $0.75
HISA account ($3500 @ 2.5%) $88.51

Total Interest: $89.26

Hmmm now we are getting somewhere $89.26 is looking a lot better then $2.50. It’s amazing what your money can do when you put it to work!

Scenario #3 – Stock Market Brokerage Account

For our last scenario what if someone still had the $1500 in their PC Financial account, but had invested the $3500 at Questrade using the Canadian Couch Potatoes most aggressive Vanguard ETF portfolio? Lets use the 20-Year annualized return of 7.75% for this example.

Yearly Return
Chequing account ($1500 @ 0.05%) $0.75
Vanguard ETF Portfolio ($3500 @ 7.75%) $262.5

Total Return: $263.25

Now we are talking, look at that! After just a year, moving some of the money into the stock market would have returned $260 more then just keeping everything sitting in the chequing account.

Longer Time-Frame Examples

Now what if we extended those examples to see what they would look like after 5, 10, and 25 year periods? We’ll use the same interest rates and compound the returns monthly for these examples.

Scenario #1 – PC Chequing Account ($5000)

Chequing account ($5000 @ 0.05%) compounded monthly
Interest after 5 years $12.52
Interest after 10 years $25.06
Interest after 25 years $62.89

Scenario #2 – TFSA HISA Account ($3500) – PC Chequing Account ($1500)

Chequing account ($1500 @ 0.05%) – HISA account ($3500 @ 2.5%) compounded monthly (separately)
Combined Interest after 5 years $469.25
Combined Interest after 10 years $1000.44
Combined Interest after 25 years $3053.48

Scenario #3 – Stock Market Brokerage Account

Chequing account ($1500 @ 0.05%) – Vanguard ETF Portfolio ($3500 @ 7.75%) compounded monthly (separately)
Combined Return after 5 years $1653.85
Combined Return after 10 years $4085.69
Combined Return after 25 years $20662.81

Put the numbers side by side

# of Years Scenario #1 Scenario #2 Scenario #3 #3 – #1
5 $12.52 $469.25 $1653.85 $1641.33
10 $25.06 $1000.44 $4085.69 $4060.63
25 $62.89 $3053.48 $290662.81 $20599.92

Wow, now we are starting to see both the power of compound interest and also the importance of making sure your money is working as hard as possible!

Now obviously these aren’t perfect examples, but they do give you a basic idea of how important getting a return on your money is!

A word of caution

Returns on the stock market are not guaranteed, you need evaluate your financial situation, appetite for risk and long and short-term goals before deciding what works best for you personally.

Another point to consider is that although it’s great not having idle money, it’s also very important not to end up in a situation where you are desperate for cash but everything you own is locked away. Any potential gain by putting your money to work could be lost if you suddenly have to take out a short-term high interest loan to deal with an emergency. This is again something you’ll have to evaluate based on your financial situation.

Closing Thoughts

My money distribution is actually a bit of a mix between scenario #2 and #3. I keep a minimal amount of cash in my chequing account, along with a small emergency fund in my Peoples Trust account. The rest of my assets are in the stock market in a slightly more aggressive version of the Canadian Couch Potato portfolio mentioned above. I expected there to be a significant difference between the return from the three different scenarios, but I was completely taken back by how big the difference is over long time frames. After writing this post I’m more focused then ever on making sure I’m getting as much work out of my employees as I can!

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