Why I still love investing in GICs

GIC stands for “Guaranteed Investment Certificate”. They’re fixed term deposits that you make, for which your money is locked up for the term of the GIC (usually 90 days to 5 years, depending on what you choose). They typically earn a slightly higher interest rate than your average savings account, which is the tradeoff for the illiquidity of your investment. Cash out a GIC early, and you forfeit the interest earned. It’s for this reason you should not buy GICs unless you’re absolutely certain you will not need to withdraw the money before the end of its term.

Many people are surprised to learn I use GICs, let alone like them, since I’m such an advocate of riskier, high-return investments like stocks. With interest rates as low as they are, there doesn’t seem to be any real tradeoff to keeping your money in a GIC vs. a simple savings account — if you dare opt for a low-interest investment vehicle at all.

But I think GICs are useful simply because they’re such a pain in the ass to get your money out of.

Why I love investing in GICs:

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Comparison of interest earned on a $3,000 3-year GIC vs. $3,000 in a savings account at Tangerine

 

I use GICs within both my TFSA and RRSP. It’s where I park money that I know I won’t need to spend for a few years, and in these tax-advantaged accounts, I love the interest boost a GIC gives over a savings account, even if it comes at a price of reduced access to my cash.

I also like the security a GIC offers. Every day that I check my balance, it’s higher than the last time I checked it. Contrast this to my stock portfolio where the bulk of my money is parked. In times like the past few weeks/months with the price of oil dropping and the stock market trying to figure it’s shit out, my portfolio is now large enough to see up to four-figure swings in a single day. Sometimes I log in and I’m hundreds of dollars down on just one stock. Yeah, I tolerate it, but it still sucks.

GICs on the other hand are placidly predictable — they never go down. I’m not risk averse enough to park my whole portfolio in GICs, but I will always, always, always hold 5-10% of it in cash, and the bulk of that is in GICs. It protects my bottom line and helps me sleep better at night.

But the real reason I lock money up in GICs is so I don’t do anything stupid with it.

Sometimes I get excited about an idea of what to do with my money, whether it’s a stock to invest in, or the idea that I suddenly “need” something that’s insanely expensive. I’d have no problem withdrawing this money from a savings account and promising to pay myself back later (ha! like that ever happens), but the pain point with GICs is just high enough to keep me from making a withdrawal for a needless expense on a whim. Usually by the time the GIC maturity date comes around, I’ve had a few months, or really years, to ponder how I would best like to use those funds.

GICs are perfect for savings you want to protect from losses such as:

  • your Emergency Fund
  • savings for a down-payment on a home
  • the cash portion of your investment portfolio
  • any large amount of money you will need to withdraw in less than 2 or 3 years

So yes, I have thousands of dollars tied up in GICs earning minimal interest (well, not too minimal on those GICs I bought years ago when rates were better!) and I like it just fine.

Truthfully every different savings and investment vehicle has something to offer — that’s why there’s so many options. You have to choose what’s best for you based on your risk profile and financial plan. For me, GICs will always make up a small part of my financial assets, and in my opinion, add more than their worth to my bottom line ;)