When comparing any two financial products, sometimes the differences are pretty stark. For example, bonds and equities are not exactly similar. Investors buy equities for capital gains, whereas with something like savings bonds there is no potential for capital growth, leaving aside compounded interest.
And yet in some cases, two possible investments are actually quite similar; this leaves consumers with a choice that may not be obvious, and to make an informed choice, requires that they know the ins and outs of the two products in question. In this post, we’re going to look at such a situation: GICs vs. high-interest savings accounts.
Broadly speaking, GICs and high-interest savings accounts share key characteristics. Both products offer principal protection, both from the financial institution that sells them and also the deposit insurance plans if the bank/credit union in question happens to fail. In this regard, GICs and high-interest savings accounts are very conservative products. They also pay regular, predictable interest. As such, GICs and high-interest savings accounts can comprise part of the fixed income portion of a diversified portfolio.
So let’s say you’d like to invest some money in a product where your principal is guaranteed and you’ll earn interest along the way. Which one should you choose?
First Things First
The first thing to ask yourself is, what are the chances you might end up needing the money? Even if you intend to keep the funds in the GIC or high-interest account for a certain period of time, life can have a way of changing your plans. Particularly on a very short-term basis, it’s much easier to withdraw money from a high-interest savings account than a GIC. This is especially true if you’re deciding between a non-redeemable GIC and a high-interest savings account. In theory, with a non-redeemable GIC, you may not be able to get your cash back before the term ends. And if you do, you will most likely forgo any accumulated interest. You can always pull your money out of a cashable GIC, but interest rates will be lower than if you invested in the non-redeemable variety.
All in all, if you’d prefer to have ready access to your money, a high-interest savings account is the better bet. That said, keep in mind that these accounts are designed for savings, not transacting. It is not uncommon to encounter $5 fees per transaction with high-interest savings accounts. Depending on the size of your account, too many transactions can very easily offset (or more) all the interest you’re making.
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Say you’ve got $1,000 and you’re trying to decide between a GIC and a high-interest savings account. Unfortunately, you may only be able to go the GIC route. Generally speaking, financial institutions require at least $5,000 in order to get the high-interest savings account rate. Otherwise, you’re stuck with the (very low) regular interest rate paid on savings accounts. As an example, Scotiabank offers just 0.10% interest on balances of between $0 – $4,999 in their high-interest savings accounts. But if you can get the balance up to $5,000, you’ll earn up to 1.50% instead. TD is the same. In contrast, most of the GICs on our site only require a minimum of $1,000 to be invested, and you’ll often get better rates.
All About Those Rates, ‘Bout Those Rates
Ok, so you’ve got enough money for both a GIC or high-interest savings account. And you’re pretty confident you won’t need the money for the duration of the GIC term, if you go that route. Now, it’s more of an apples-to apples-comparison. In this event, your choice can be decided by which product offers the highest interest rate.
With a bit of searching, GICs will tend to win out over the high-interest savings account. One-year GICs in Canada currently pay anywhere from 0.55% to just over 2.00% annually, whereas you’re doing very well if you can find a high-interest savings account paying even 1.50%. When you subtract the annual inflation rate from those numbers, as we’ve explained how to do here, you know that the highest interest rate (also known as the nominal rate) will preserve your spending power – so that’s why you always want to comparison shop and find the best rate.
We titled this post “GICs vs. high-interest savings accounts”, but hopefully it’s now apparent from our discussion that there isn’t a one-size-fits-all answer. As with many financial issues, deciding on the best investment for yourself first starts with considering your own situation. Once you know what you need, you can then choose the product that’s best for you.
Flickr: Ken Teegardin