Canada Savings Bonds have been sold every fall in Canada since they were introduced as Victory War Bonds in 1946. Promoted as a safe and secure savings product they are issued by the Government of Canada. Historically they have been popular as a flexible and convenient savings program. But are they a good idea?
Yields on Canada Savings Bonds, always lower due to their low risk, have declined significantly in recent years reflecting the low interest rate environment we are living in. The 2012 Canada Savings Bonds will pay just 0.5% interest in the first year. Rates for subsequent years are unknown as they are set each year around October for November 1. Yields on Canada Premium Bonds (available only through a financial institution, more on that later) are a little higher at 1.0% for the first year with a three year average yield of 1.19%. All of these rates are below yields offered through many on-line high yield investment savings accounts or 1 year Guaranteed Investment Certificates and are below our current rate of inflation.
Despite this about a million Canadians purchased Canada Savings Bonds each year. Most are sold through payroll deduction plans with their employer. In fact, beginning in 2012, Canada Savings Bonds can only be purchased through payroll savings plans at work. If you wish to purchase your bonds through a financial institution you must now purchase Canada Premium Bonds.
The million dollar question is — how good of a saver are you? Everyone knows that saving money for the future is a good idea. Unfortunately some of us are better savers than others. If you are the type of person that if you have an extra $20 in your bank account at the end of the week you will be tempted to think of that as spare money and spend it at say the movies or on a trip to the coffee house, then a forced automatic savings program is a good idea for you. A program set up through your employer is convenient and not something you have to arrange on your spare time. So if your alternative is no savings or purchasing Canada Savings Bonds through your work payroll deduction program then perhaps it is a good idea for you, low rate or not. But if you have the time consider investigating other options.
Next week: Should you save or pay down debt?