If you have some money you’d like to park in a safe savings vehicle (pun totally intended), you’ll have to decide what product to choose. Where should you put your funds? It depends. It depends how much you have to invest, when you need the money, and whether you’re looking for some exposure to the stock market.
There are a number of savings products available to Canadians. Here’s a quick rundown of the options consumers can choose from.
Regular savings accounts: These accounts pay a little interest, but not much these days (0.10% to 0.15% is common).
High-interest savings accounts: Available from both the big banks and online banks as well, these accounts pay (as the name suggests) a higher rate of interest than the traditional savings account. An interest rate of 1.50% to 1.75% is pretty common but some pay more. Note that high-interest savings accounts usually come with a few transactions per month, after which a saver can get hit with pretty steep fees.
GICs: GICs are term savings products, meaning that you place your money with a financial institution for a set amount of time and it pays you interest in return. GICs can be as short as 30 days, as long as five years, and pretty much any length in between. The longer the term, the higher the interest rate. GICs can be either redeemable or non-redeemable. Redeemable GICs can be cashed in at any time, whereas non-redeemable GICs are usually only cashable at the discretion of the bank and with some sort of interest penalty applied.
U.S. dollar GICs: These products are denominated in and pay interest in U.S. dollars. Interest tends to be minimal.
Market-linked GICs: Sometimes referred to as equity-linked GICs, these products are a hybrid investment, combining aspects of a traditional GIC and exposure to the stock market. You won’t lose more than your initial investment, but if the market falls you may not receive any interest at the end of your term.
Which route to take?
So what savings product should you go with? It really hinges on your personal needs and situation. Let’s look at some common scenarios and the most appropriate choice that comes with each.
- You want to earn the highest interest rate possible and are sure you don’t need the funds for a while. In this case, a long-term, non-redeemable GIC is probably your best bet. You’ll earn a reasonably high interest rate (at least in today’s low rate environment), because you are willing to part with your money for a long period. Just keep in mind that with longer-term GICs, the key risk is that inflation increases during your term, which will erode your purchasing power.
- You’re saving to buy a car within the coming year and have accumulated $10,000. Either a high-interest savings account or a redeemable GIC will suit your needs. High-interest savings accounts typically require a minimum investment of $5,000, which you obviously meet.
- You’re looking to diversify some of your Canadian dollars into another currency. If you find yourself in this situation, check out a U.S. dollar GIC. Keep in mind, however, that foreign currency GICs are not CDIC-insured.
- You want some exposure to the stock market and are okay with the possibility that you may not make any interest at all over the next three years: This perfectly describes someone who’s comfortable with an market-linked GIC. That said, as pointed out in a prior post about market-linked GICs, give some thought to a strategy where you place some money in a traditional GIC and the rest in something like an index fund. The big downside of market-linked GICs is you can literally not make anything.
- You want to invest $3,000 on behalf of a young child: You can consider either a regular savings account (likely a youth savings account) or a GIC. Chances are very good you’ll find a much better rate with the latter.
Recognize your situation
The first thing you should do before making a decision about where to place your money is to reflect on why you’re saving. If the money’s for an emergency, you won’t want it tied up in a non-redeemable GIC, which usually can be accessed but does present a hassle. Similarly, if you think you’ll need to make a bunch of transactions with the money, be sure that you’re not racking up large fees in the process with a particular account. Once you know what your needs are, the next step is to shop around for the best rate.
- How to Maximize Your CDIC Coverage
- Are online banks safe?
- How Inflation Can Deflate Your Savings (And How to Protect Yourself)
Flickr: Alex Vakulenko