The moment you start investing, one of the things you look for is investment security because it’s never fun to lose your hard-earned money. However, a Guaranteed Investment Certificate (GIC) is one of the safest investments around.
When we talk about an investment, we’re really talking about the careful balance of maximizing return while satisfying your risk tolerance and financial needs. That’s why it is so important to choose the GIC that fits you best as well as giving you the best return.
Do you want to put your GIC in a registered account?
Did you know that certain GICs are eligible for registered accounts, like registered retirement savings plan (RRSP), Tax-Free Savings Account (TFSA), or registered education savings plan (RESP)? The main advantage for keeping a GIC in a registered account is that you won’t be taxed on any of the interest.
Let’s look at two accounts: one registered and the other not. With an initial capital investment of $10,000 kept over two years with a 1.30% interest rate, you would have the following:
|Registered Account||Non-Registered Account|
Keeping the GIC in a registered account saved $99 dollars in tax. You, the investor, would have realized the promised total return of 1.30%.
When will you need the money ?
That’s really the most important question. Investment terms range from shorter-term like 30 days, to longer-term like 10 years. It is critical that you carefully evaluate when you’ll need the money, especially since you’ll be charged penalties if you take the money out before the term is scheduled to end. Those penalties can eat away at your returns – you might even come out with nothing gained.
Take a longer term only if you won’t need the money. The thing to remember is this: the longer your investment horizon, the higher your interest rate. Unless it’s a mortgage, a longer time means better rates.
Here are some examples to give you an idea about the relationship between time and interest rate.
|30 Days||1 Year||5 Years|
Don’t fool yourself into choosing longer terms than you can realistically handle, because if things don’t work out, you’ll lose all the additional interest you dreamed about.
Do you want redeemable or cashable certificates
Don’t know how much time you have to invest? Estimate your investment time horizon and remember to err on the side of caution to avoid incurring any charges for early redemption. If you really have no idea, opt for a redeemable GIC.
You have the option of redeemable or cashable GICs. These types of GICs let you withdraw the money before the end of the term. The downside is that the cashable rates are usually lower. For example, 5 year redeemable GICs have rates around 1.55% whereas the 5 year non-redeemable GIC rate hovers around 1.70%.
How and what amount are you going to invest ?
GICs have minimum investment amounts. If you’re not ready to invest the minimum required amount, consider another investment type or choose a GIC with a lower threshold. You can find some that require as little as $500 to start. If you’d rather invest without a lump sum and want to build your fund with periodic payments, GICs are not the right place for your money.
Do you have faith in the economy ?
Kind of a weird question, no ? Most GICs offer fixed, pre-determined rates, which mean that you know the lifetime interest rate for the investment in advance. Other GICs have variable rates, which increase in relation to the financial institution’s preferred rate. In the long-term, variable-rate GICs often outperform fixed-term GICs, but fixed-term GICs protect your money from any interest rate dips.
Do you want a GIC or high-interest savings account?
Financial institutions advertise high-interest savings accounts with returns between 1.25% and 5.50%, and you can withdraw the money at any time without penalty. If you’re leaning toward a redeemable GIC, it might be better to use a high-interest savings account with a killer promotion. You’d have an interest rate higher-than or equal-to the redeemable GIC without any of the GIC redemption hassles like making the request, delays, etc. Still, if you’re sure that you won’t touch the money until the term ends, opt for a locked-in GIC. It will give you a better return than a high-interest savings account.
Do you need a GIC or a bond ?
Like GICs, a bond lists its interest rates at the outset, but its value might fluctuate during the term. Bonds return dividends throughout the lifespan of the deposit while GICs do not. If you want steady, periodic deposits, choose bonds. While you cannot cannot touch the money, you can sell your bond at any time on the bond market, which behaves just like the stock market. The bond’s interest rate will depend on the likelihood of the issuer’s ability to pay the debt: the more reliable the issuer, the lower the rate. However, you might never realize the bond’ value, unlike a GIC which is guaranteed by the Canadian Deposit Insurance Corporation (CDIC).
Despite all these little differences, if your plan is to get the highest interest rate and you have a time horizon greater than 2 years, bonds generally outperform GICs. If your timeline is greater than 2 years and you can handle a little volatility, choose a bond. If the reverse is true, opt for a GIC.
Choosing a GIC is fast and easy. First, choose your investment time horizon. Second, and based on the amount you are ready to invest, use a comparison tool to find those GICs with the best interest rates for your investment amount and timeline. If you’ve researched the market and are optimistic about its direction, you can choose a variable-rate GIC. Finally, make sure to read the terms and conditions so you avoid any unexpected costs.
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