Sunday, February 23

Why Your Savings Strategy Needs GICs

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This is a sponsored post written by me on behalf of EQ Bank. However, as always, all opinions are my own.

Guaranteed Investment Certificates (GICs) are an awesome way to save for a financial goal with a specific timeline. These are super-safe cash investments that offer better returns than savings accounts.

What are GICs?

GIC stands for Guaranteed Investment Certificate and is a type of investment that has both a fixed term and a fixed return. For example, you might buy a 5-year GIC that pays 3.50% interest. This means in order to get the 3.50% interest on the cash you invest, you cannot touch your principal for the 5-year term.

GIC terms can range anywhere from 30 days to 5 years. Typically, longer terms offer higher interest rates as an incentive to keep your money invested longer. When a GIC term is completed, it is said the GIC has “matured”. The interest your money earns in a GIC can be paid annually or at maturity.

GICs can be either cashable or non-cashable. You may receive a lower interest rate or even 0%. There can sometimes be additional penalty fees for cashing the GIC out early. Non-cashable GICs cannot be redeemed before the maturity date. Your money is locked in for the entire term, so make sure you really don’t need it before you choose this investment option.

How to buy a GIC

Investing in a GIC is easy, as most banks offer these investment vehicles. However, make sure to shop around because interest rates can vary tremendously from one institution to another. You want to get the best rate possible since you won’t be able to switch once your money is put in a GIC for a fixed term!

Earlier this year, I opened a savings account with EQ Bank. This was part of my “out of sight, out of mind” savings strategy to stop me from dipping into my savings account to buy things I wasn’t saving for. A few months after I opened my savings account, they released GICs with some of the highest interest rates I’ve seen since I started blogging about personal finance. Granted, some of that is thanks to Bank of Canada finally raising interest rates, but EQ Bank is offering some of the most competitive GIC interest rates out there.

EQ Bank’s current 1-year GIC interest rate of 2.76%, and their 5-year GIC interest rate of 3.50% are among the best rates I’ve found online. EQ Bank has actually increased their 5-year GIC rate since I featured them in my post, The 4 Best High-Interest Savings Accounts in Canada a few weeks ago!

If you want to know what these returns actually look like in $$$ terms, you can use the calculator on EQ Bank’s website. In the table below, I compared the value at maturity of $1,000 or $5,000 invested in either a 1-Year or a 5-Year GIC:

There’s nothing I love more than using my money to make more money!

How GICs can help you meet your financial goals

GICs are an awesome place to save for big purchases, like a down payment on a home, because you’ll be able to get a better interest rate than a savings account.

To save for a big goal using GICs, follow these simple steps:

STEP 1: Determine your goal amount

Whether you need $5,000 for an international vacation or $25,000 for a new car, you need to know the exact amount you need to save so you can start saving it.

STEP 2: Determine your timeline

Because GICs have precise terms, it’s essential you know when you’ll need the money you’ve saved so you can plan your GIC maturity dates accordingly. You don’t have to drill down to the exact day you’ll be withdrawing your cash, but you should have an idea like, “I want to complete my savings goal by Spring 2021”.

STEP 3: Choose your GICs

If you’re reading this thinking, “Hey, I’d really like $10,000 in 5 years but I don’t have that money right now so how do I buy a GIC?!”, fear not! You don’t have to put all your cash in one GIC. Instead, you can buy a series of GICs with progressively shorter terms so they will all mature at the same time.

For example, let’s say your goal is to save $10,000 in 5 years but you only have $1,500 right now. You would put that $1,500 in a 5-year GIC. Maybe over the next year, you’ll save up an additional $2,000. You would then put that $2,000 in a 4-year GIC. You’d keep this strategy up until 1 year away from your goal date when you would buy your last GIC with a 1-year term. A year later, all your GICs would mature and you’d have the full amount of your savings goal — plus interest!

As a result, your savings will stay as savings and you don’t spend it frivolously.

Using GICs to invest for the long-term

GICs are also a great tool for very long-term savings, like RRSPs or your child’s RESP. When you’re on an investing timeline measurable in decades, you want to seek out the highest return possible which typically means putting your money in the stock market. This ensures you don’t have everything at risk in a market downturn.

GICs are the perfect investment vehicle for your cash allocation in any investment portfolio because they are super secure while still offering you a great return on your money.

Investing in GICs is part of a balanced financial strategy and a great way to balance out riskier investments in your portfolio while still netting you a great return.

Rates shown are in effect as of May 28 2018 and are subject to change. For GIC terms equal to one year, simple interest is calculated on a per annum basis and paid at maturity. For GIC terms of over one year, interest is calculated on a per annum basis and paid either annually (simple interest) or at maturity (compounded annually). Interest is accrued for the entire GIC term. Non-Redeemable.

For more GIC rates and information, visit eqbank.ca. EQ Bank is a trade name of Equitable Bank.

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

1 Comment

  1. We have a small portion of our portfolio in GICs. It’s not a lot because our goal is longer term, but it provides a ton of security and peace of mind.