For the past couple of years, earning 4–5% on cash has felt like a great deal. After years of almost nothing being paid on savings accounts, Canadians suddenly had the opportunity to earn meaningful interest without taking much market risk. A lot of people moved money into high-interest savings accounts and GICs because, honestly, it felt like the smart thing to do.
And for money you might need soon, it probably is.
The problem is when we start treating a 4% return as a long-term investment strategy.
The first issue is taxes. Interest from a HISA or a non-registered GIC is generally taxed as regular income. So if you’re earning 4.25% but you’re in a 35% marginal tax bracket, you’re actually keeping roughly 2.76% after tax. If inflation and the cost of living are rising around 3%, you’re not really building much purchasing power.
And that’s the part that gets overlooked. A return can be positive on paper while your purchasing power is barely moving.
I completely understand why people like cash. It doesn’t fluctuate every day. You don’t wake up and see that your savings are down 15%. You know what you’re getting, and that peace of mind has value. In fact, I’ve written before about my own “Peace of Mind” Fund and why having accessible cash can be about more than just emergencies.
But there is a difference between keeping money safe and keeping too much money safe.
Your emergency fund should probably be in a HISA or another low-risk, liquid option. Money you’re going to need in the next year or two also shouldn’t be taking unnecessary investment risk. But if you have money you genuinely won’t need for 10, 20 or 30 years, keeping all of it in cash because 4% feels comfortable could become its own form of risk.
This is why I like to think about money based on its job.
Some money is there for emergencies. Some is for a house, a car or another major purchase. And some money is there to build long-term wealth. Those dollars don’t necessarily belong in the same place.
For short-term cash, prioritize safety and liquidity. If you have TFSA room, using it for eligible cash or savings can also eliminate the tax drag on the interest. But for long-term money, I think investors should at least ask themselves whether sitting in cash is really the best strategy.
I’ve talked before about how I invest biweekly instead of trying to time the market. For me, the biggest advantage isn’t trying to predict what the market will do next. It’s simply putting money to work consistently and removing emotion from the decision.
That doesn’t mean you need to put everything into the stock market tomorrow. It could simply mean investing gradually through automated contributions into a diversified portfolio. I’ve also written about the lazy approach to investing with ETFs and why keeping investing simple can often be more effective than constantly looking for the next big opportunity.
The same thinking applies to dividend investing. My approach to building dividend income is another example of putting long-term capital to work rather than simply letting it sit in cash.
Of course, none of this means you should ignore your overall financial picture. Where you keep your money, how many accounts you have and how you organize everything can make a difference too. I’ve even written about whether having multiple financial accounts actually makes you richer.
The biggest danger isn’t earning 4%.
The danger is becoming so comfortable with 4% that you stop asking whether your money could be doing more.
Cash has an important place in a financial plan. It gives you security, flexibility and peace of mind.
But cash should have a purpose.
The goal isn’t to find the highest savings rate. The goal is to make sure every dollar is working toward something – protecting you today, giving you flexibility tomorrow, or building your wealth for the future.