What to Consider Before Buying a GIC: Your Time Horizon

by Jordan Lavin July 6, 2017 / No Comments

Saving and investing are extremely personal activities. Everybody has different intentions, different risk tolerances, and different saving goals. There are many ways to invest your money, but the choice of which investments to make comes down to your personal situation.

GICs are a great investment when you’re looking for a safe and predictable way to grow your money. But it can feel like a complicated decision when you’re choosing what kind of GIC to invest in. Because GICs lock in your money for a set period of time, the biggest decision you’ll have to make is the length of time, or term, you want to lock in for.

GICs work by paying you a set interest rate in exchange for a time commitment. If you invest in a one-year GIC, you can’t withdraw until the year is up. Longer terms come with higher GIC interest rates, but making a years-long commitment can be risky, especially if there’s a chance you’ll need that money before the GIC matures.

So how do you decide what term to commit to?

As with all investments, the decisions you make should be directly related to your goals. It doesn’t need to be a difficult calculation. Just consider what you’re saving for, and make sure the investments you choose will help you achieve your goals.

Read: What’s the Future of GIC Rates?

Fortunately, most saving goals have some sort of measurable time component. If you’re saving to buy a car, your time horizon is based on when you’ll need that new car. If your current vehicle is brand new, you probably have five years or more to save for the next one. If it’s on its last legs it’s more of a question mark, but you probably have a good idea whether it’s more likely to last for a few more years or a few more months.

Other savings goals follow similar patterns. If you’re saving for retirement, you know when you’ll reach retirement age. If you’re saving for a vacation, chances are the date is already circled on your calendar.

When choosing a GIC term, keep your time horizon in mind and choose a term that’s compatible.

If your time horizon is less than a year, choose a short-term GIC. These range in length anywhere from one to nine months and are perfect for savings goals that are coming up quickly. And if you’re tempted to dip into your savings, a short-term GIC is a great way to make sure you don’t accidentally spend your vacation fund before you go away. Just make sure the GIC matures with a little time to spare before you need the money.

If your time horizon is longer than a year, choose a long-term GIC. These range in length from one to five years, and you’ll occasionally see even longer terms offered. You can use long-term GICs to save for your child’s future education, your retirement, or anything that’s a fair while in the future. You can also choose long-term GICs if you’re just investing to grow your wealth, but be sure to keep some of your money in cashable investments in case you need to access it. Cash in a high-interest savings account is a good low-risk alternative to a GIC.

If you’re not sure how long your time horizon is, err on the side of caution and invest in a shorter term than you think you’ll need. Going back to the car example above, if you think your car will last for two more years, invest in a one-year GIC just in case it breaks down unexpectedly. You can always re-invest in another GIC after the year is up if you don’t need the money just yet.

You can also invest in a GIC alternative if your time horizon is unclear. The best high-interest savings accounts offer competitive rates so you can grow your money and still access it whenever you need. You can also choose to invest in bonds, which carry slightly more risk but can be resold at any time.

Investing in GICs isn’t difficult, but it does require a bit of thought before you get started. Once you have a good idea of your time horizon, look for the best GIC rates (note you probably won’t get the best rate at the bank you use most) and grow your money.

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