About one in five adult Canadians is obese, indicating our inability to stick to a diet. We’re no better when it comes to financial planning.
Designed correctly, however, these mental lines in the sand can prevent wrong decisions and help you achieve savings goals.
This is a strategy is especially important for younger people. They don’t have the same earnings power as an older couple but likely have more expenses, such as home or car payments.
Saving for a trip
There’s a strategy you can try. Suppose you want to go on a trip; we’re not talking a weekend in New York. Think of a jaunt to South Africa to tour the Kruger National Park.
It’s a great big trip with a great big price tag. A round-trip flight for two to Johannesburg could cost around $3,000 or $4,000, depending on the time of year you go. So you need to save the cash. And you need to squirrel the nest egg away where it will earn a return and be removed from where you could be tempted to dip into your savings occasionally.
Most individuals might jam the money into a savings account. But here’s where the inability to turn away from the all-you-can-eat buffet table comes into play.
It may be mighty tempting if you need to repair that ding on your car door or you want to buy your kid new sports equipment. All you have to do is take the needed funds from the trip money. Maybe you’ll even tell yourself that you’ll make the loss up before you head across the Atlantic.
Unfortunately, for too many Canadians, the $50 they take out in August gets added to the $100 they withdraw in September. And before you realize it, that $10,000 saved for a South African safari is now $6,000.
And your trip to Africa soon becomes a trip to Disney’s Animal Kingdom in Florida. It’s still fun but hardly the exotic getaway you envisioned.
GICs to the rescue
One practical solution? Buy a GIC with your travel cash. A GIC is an investment that offers a set rate of return over a defined period of time.
The principal is guaranteed, as are the promised interest payments. GIC interest rates are generally higher than a high-interest savings account.
For example, a one-year GIC from Oaken Financial has a rate of 2.75% while the EQ Bank Savings Plus Account has a rate of 2.3%.
If you buy a $5,000 GIC a year before you want to leave, you’ll make $137.50 in interest. It’s a modest amount but still better than the $115 you’d earn placing the same money in the savings account.
Locking your cash away
An even more important advantage for the potential vacationer is the term on the instrument. Placing your money in the GIC means you can’t touch it for a certain period of time. The term removes the hankering to dip into this cash stash.
In the savings account, not only are you earning a lower return, you risk chipping away at this money before you leave.
While you can cash in a non-redeemable GIC, you do have to pay a penalty. Alternatively, you can buy a redeemable GIC (but have lower GIC rates), which means you can cash in the GIC prior to its due date.
That might be useful if you’re saving for a trip but figure there’s a risk you might need the cash earlier.
But, if you’re set on that trip of a lifetime and don’t see any financial obstacles down the road, buying a non-redeemable GIC makes you money and protects you from the temptation to use the cash prematurely.
The idea is not to hamstring you from getting your money. It’s to give you a fighting chance to save for that once-in-a-lifetime vacation before you’re too old to enjoy the trip.