When it comes to saving, you have a lot of options of where to place your money in order to meet your goals. Most people naturally think of high-interest savings accounts as the best place to save, but GICs can be an excellent investment for any savings goal with a timeline of a year or more.
GICs can be highly effective for saving for a down payment on your first home. If you have money set aside that you won’t need to use for anything else, you should consider GICs as an attractive high-interest option to help your savings grow. And if you want a better return on your money, make sure to look for the best GIC rates.
What is a GIC?
GICs are a type of fixed-income investment for which you earn a guaranteed interest rate for a specified term. Interest rates on GICs are typically higher than those offered by your average savings account. And GIC terms typically range from 60 days to five years. When your GIC reaches the end of its term, it’s said to have matured.
If you choose to cash in a non-redeemable GIC before it reaches maturity, there will likely be a penalty causing you to lose all the interest you’ve earned. This is why GICs are an excellent place to stash your long-term savings. You’ll be less inclined to raid the money for an impulse purchase. The penalty for an early withdrawal can be enough of a deterrent to keep your money where it is and help you be a more disciplined saver. However, if you think you might need access to your cash for any reason during the GIC term, you’re better off keeping the money in a savings account where you won’t face any penalties for early withdrawal.
What’s GIC laddering?
GIC laddering is a savings strategy that involves investing your money in a selection of GICs with different terms. This means if you have $5,000 to invest, instead of investing the whole amount into one GIC with a five-year term, you might instead choose to invest $1,000 in five GICs with five different terms (one-year, two-year, three-year, four-year, and five-year terms).
Laddering your GICs protects you in two ways. First, you’ll be less exposed to fluctuations in interest rates. If interest rates increase, you’ll always have GICs maturing every year to take advantage of higher rates. If interest rates decrease, only some of your GICs are exposed to the lower rate. Second, laddering your GICs will give you easy access to your savings annually. In the event of an emergency or another reason you might need some cash, you likely have a GIC maturing soon that you can use as needed.
Another way to stagger your GICs
You can also use GICs to help you stay disciplined when saving towards a big goal. For example, if you plan to buy a house in three years, you might choose to invest a portion of your savings for a down payment in GICs every year so they all mature at the same time. This means you’ll buy a three-year GIC this year, a two-year GIC next year, and a one-year GIC in the following year. By selecting GICs with progressively shorter terms each year, you ensure they’ll all mature at the same time when you’re ready to buy your home.
The bottom line
When it comes to maximizing your savings, GICs can be a valuable way to help you earn a high return on your investment while staying disciplined towards a specific savings goal. This makes GICs an attractive investment to add to your financial plan.