When you need to save money and you want to invest in a low-risk way, the GIC is a valuable tool you can use. The principle is simple: Choose how much money to invest and for how long, and when your term is up you’ll get your money back plus interest. The investment is guaranteed and there’s virtually no chance of you losing your money.
The GIC’s simplicity and predictability makes it a popular investment choice. But as with all investments, you need to choose a GIC because it will help you meet your financial goals—not because it’s easy. So what are the best uses for a GIC?
Keep your hands out of the cookie jar
The beauty of GICs is you usually can’t redeem them before their term is up. So if you’re liable to dip into your savings from time to time, a GIC can help make sure you leave your money alone. Terms of up to five years (and sometimes longer) are available so you can protect your savings from yourself for a long time.
Just keep in mind that an early withdrawal may be expensive or impossible. So be sure you can afford to part ways with your money for a certain length of time. If you generally can’t cover your expenses without taking from your savings, you might want to re-evaluate your budget instead. It doesn’t make sense to lock your money in a GIC if it means you’ll need to take on debt down the road.
Dreams with a deadline
If you have a big expenditure coming up that’s more than a year or so away, a GIC can help you make sure your money will be available when you need it. For example, if you’re planning a big vacation for an important anniversary, you can invest in a GIC that matures around the time you’ll want to book. The interest you earn might help you get a little closer to your savings goal, too.
You can also use this strategy to save for an upcoming wedding, family reunion, or anything else that you can put a date on. It doesn’t work as well if you’re not sure when you’ll need your money, like if you’re saving to buy a car. In that case, you might want to try a high-interest savings account instead.
Balance your portfolio
If you’re a do-it-yourself investor and you want to keep a portion of your money in a place that’s not vulnerable to the ups and downs of the markets, a GIC is a good tool to use. GICs pay a set rate of interest, regardless of what happens to stocks or bonds. If there’s a significant downturn, you might find your GIC saves the day. However, higher-risk investments have produced a much better return over the long run compared to GICs. So make sure to diversify your portfolio and only use GICs for a portion of your overall investments.
Fix your income
When you retire, you can’t afford to risk your savings in volatile investments. After you retire, it makes more sense to keep your money in safe, stable investments like GICs.
A strategy you can use during retirement is a GIC ladder. Rather than putting all your money in one GIC, you can invest in many GICs of differing term lengths. This gives you a balance of the best GIC rates (which are usually found on five-year GICs) and regular access to your money. If you know how much you need to draw from your savings when you’re retired, you can set up your GICs to pay out just the right amount on a regular basis.
Show your kids how investing works
Kids are naturally curious about money and they start experimenting with its value early in life. (If your sibling ever traded you their nickel for your dime because it was bigger, you know what I’m talking about.) To give your kids a real-world example of how investing works, take a portion of their savings and put it into a GIC.
Depending on how old your children are, you can use a short-term GIC to get demonstrable results relatively quickly by choosing one with a term as short as 30 days. Show them how you go about comparing GIC rates, how to open the account, and how much more money they have after the term is up.
Beef up your RRSP and TFSA
GICs are eligible as RRSP and TFSA investments, so take advantage of the tax savings that are available to you. Just keep in mind there are special rules for RRSPs and TFSAs, so make sure you understand how using these tax shelters will affect your investments.
Use your imagination
These are just a few of the best uses for GICs, but the possibilities go on and on. Whatever you’re saving for, a GIC can help you reach your goals. Give some thought to what your future plans are and consider whether a GIC can help you save.
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Flickr: KMR Photography