Once you start building your savings, it’s important to put your money to work so that it’s not sitting idle.
One great option, especially for the risk-averse, are guaranteed investment certificates, AKA GICs.
Sooo.. What’s a GIC?
A GIC is a short-term loan that you provide to your credit union or bank in exchange for interest. GICs can come in a variety of different forms and durations, from a single month to ten years or more!
GICs have maturity dates
GICs mature after period of time. Let’s say you buy a GIC with a 1-year term. After the 12 months are up, the GIC will mature and you will receive your original investment back. It’s important to remember when your GICs mature, so you can maximize the interest you earn over time!
There are two types of GIC: cashable, and non-cashable
Cashable GICs are ideal if you may need the cash you invest in the near future, as they provide savers the option to redeem the funds before the GIC matures. Sometimes a GIC is immediately redeemable with no penalty, but usually they require the funds to be invested for at least 30-90 days before they can be redeemed without penalty.
As a result, GICs redeemable after 30 days or less are ideal for the first two months of your emergency savings, with the third month invested into a high-yield savings account so it's immediately accessible. The yields on GICs are lower than non-cashables, but are generally much better than the rates you’ll receive from high-yield savings accounts.
Non-cashable GICs are the best choice for long-term savings. The longer the term, the better! They offer higher yields than cashable GICs, but penalize savers who redeem funds before the maturity date, so make sure you invest money you won’t need!
Non-cashable GICs are ideal for retirement savings, or for big ticket items, like buying property or a car. But! Make sure that when you purchase a non-cashable GIC, that the interest you earn is “compound,” instead of “simple.”
Simple interest is calculated based on the original amount of your investment (known as your “principal”). If you invest $1,000 for 5 years at 4%, your annual interest earned will be $40, and will be worth $1,200 by maturity.
See, it's simple!
Compound interest is different. It takes each dollar that you earn in interest, and automatically reinvests it back into your GIC. So let’s say we take the same 5-year GIC yielding 4%, and assume Interest is earned in monthly portions. The value of your investment would be worth $1,221 by maturity, for an average annual income of $44.2, which is 10% higher than the average annual income you would receive from a GIC that pays simple interest!
Sure, you may have only earned $21 more, but trust me: The more you save, the more significant compound interest becomes! I’ll write an article dedicated to showing its importance soon.
GICs are purchased at no charge
Since a GIC is a loan, you should never be charged any purchase fees for buying one. Imagine lending money to a friend, and having to pay them a fee for the privilege of borrowing from you! I don’t think so Bob!
GICs may be purchased in non-registered and registered accounts
GICs are purchasable in registered accounts, like your TFSA and RRSP, as well as non-registered savings and checking accounts. If you haven’t maxed out your TFSA and RRSP, be sure to favour saving money in those accounts before your non-registered accounts, except where it concerns your emergency funds and short-term savings.
Feel free to check out my article on the different types of savings accounts here!
GICs are non-traded
GICs are assets that are non-traded, meaning they are not tradeable on public stock exchanges, like the Toronto Stock Exchange. This makes GICs a great choice for people who struggle with volatile assets, like stocks and bonds.
GICs are 100% insured by the Canada Deposit Insurance Corporation (CDIC)
GICs are fully insured by the CDIC up to $100,000 per registered savings account, and $100,000 in a non-registered savings or checking account.
Some banks even offer higher rates of insurance. For example, RBC insures CDIC-protected accounts up to $400,000 each, Wowie!
Sleep easy honey. Your money is safe (unless the apocalypse happens, dun dun dun).
Available GIC options
Below is a chart that shows some of the options savers currently have for cashable and non-cashable GICs. I like simple, no-frills GICs because, well, I’m basic and I like consistency.
As soon as a bank offers me anything more than a fixed-rate of interest for a GIC’s duration, I assume they’ve designed the product with the expectation that I will have a higher likelihood of redeeming early so they can collect penalty fees.
Anyhoo, here's the list!
GICs are purchasable online
That's right! If you would rather hermit than go and talk to a bank rep, most institutions offer options to buy GICs online. But, if you meet with a representative in person, you can get a higher rate! And once you meet them in person, a simple email to them will do the trick.
For example, in the list provided, you'll notice that RBC's 5-year non-cashable GICs yield 4.2%, and its cashables yield 3%. I recently bought a cashable GIC with RBC at 4% instead of the 3% online, all because I talked directly to my local bank rep. Easy honey!
So build those bank relationships. and maximize your interest, mwah!