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Can GICs protect your money from inflation?

Graham Christian

* This article is sponsored by EQ Bank

As Canadians nationwide grapple with the month-to-month challenge of rising inflation, many are wondering how best to protect their savings. While the downsides to inflation are plenty, the Bank of Canada’s decision to raise its benchmark interest rate produced a silver lining for those holding their funds in savings accounts and looking to buy guaranteed investment certificates (GICs). 

Long considered a safe but not-exactly-thrilling choice by financial experts, GICs are currently having a moment as more Canadians begin to see them as a viable short-term investment option. 

But what are GICs, and how can they help protect your money against inflation? Let’s take a closer look.

 

What are GICs?

GICs (or guaranteed investment certificates) are investment products that offer a guaranteed interest rate over a specific length of time chosen by you. While these terms can run anywhere from one month to 10 years, generally the longer you choose to invest for, the higher your rate of return will be.

The interest earned on a GIC may be paid out monthly, quarterly, semi-annually, annually or at maturity, depending on the type of GIC and the provider. Once your GIC term ends, or reaches maturity, you’ll get back your principal investment plus any outstanding interest owed.

 

How do GICs work?

Banks and other financial institutions offer investment products such as GICs as a way of borrowing money from their customers, and they pay out a certain percentage of interest to you as an incentive. The money invested in GICs is then used by the bank to provide loans and mortgages to other customers at a higher rate of interest, thus making money for both you and your financial institution. 

Because of this, your principal investment in a GIC is locked in until the end of your chosen term, unless the GIC is “cashable” or “redeemable” (for a fee).  Not all banks offer cashable or redeemable GICs, plus these types of GICs tend to pay lower rates of interest. 

Once your GIC’s term ends, you’ll get your full investment back plus the prescribed interest on top. At this point, you can either cash out or reinvest your money in a new GIC, compounding the interest you’ve already earned.

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How GICs can protect your money from inflation

Now that you know how GICs work, let’s explore a few reasons why they’re a smart investment option to combat inflation (and the market instability that comes with it).

 

Higher-than-average interest rates

Not long ago, when interest rates were much lower, you’d have to accept a lengthy commitment to earn serious interest on a GIC. With rates rising across the board, however, that’s no longer the case, and many investors are now finding excellent returns on short-term GICs, as well. 

A good example would be EQ Bank’s current rates, offering excellent yields on both short and long-term GICs.

Added security

While playing the stock market may offer quick and exciting payouts during times of growth, it can get stressful if things take a downturn. As we continue to move through the uncertain waters of a post-lockdown economy, many investors are finding it increasingly important to find a place where their money can be protected. 

GICs, as it happens, are one of the most secure investments you can make. Insurance on GICs is two-tiered. The first layer of protection is provided by the bank or other financial institution you purchased your GIC from, as they’re required to return your full principal amount plus any prescribed interest. But what if the worst happens, and your bank dissolves? While it's an incredibly unlikely scenario, that’s where the second tier comes into play.

Most GICs are eligible for deposit insurance from the Canada Deposit Insurance Corporation (CDIC), an independent crown corporation that covers deposits of up to $100,000 at CDIC member institutions. Depending on where you purchase your GIC, it may instead receive coverage from a provincial organization, which will have its own rules.

 

Guaranteed return

Unlike the interest rates of savings accounts and other investments (which may rise and fall according to market conditions), the return on a GIC is guaranteed - it’s right there in the name.

While the safe predictability of GICs typically came at the expense of a high yield, that’s no longer the case. With even short-term GICs now offering eye-catching competitive rates (especially those offered by online institutions such as EQ Bank), risk-averse investors can get the best of both worlds: stability and growth.

 

The bottom line

During times of economic uncertainty, GICs have always been a safe harbour for investors looking to protect their savings while earning a little on the side. With the recent uptick in interest rates, however, GICs now offer more bang for your buck than ever. Combined with their next-level security, that makes GICs a more effective way to survive inflation than ever before.

 

Also read:

How to make the most of rising GIC rates

How to combat inflation in Canada

Are GICs worth it? 6 times when GICs make sense for investors

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