3 Reasons to Consider a GIC

Frank Gasper |

At the time of writing this article, interest rates are on the rise and consequently, I have been getting plenty of inquiries about GICs from clients. With GIC rates over 4%, it's hard to deny that in some cases, a GIC might be a good choice for this moment in time.  

What is a GIC? 

The simple definition of a Guaranteed investment certificate or GIC is that it offers a fixed interest rate for a specific amount of time. This makes a GIC a low-risk investment since returns are guaranteed. For example: Deposit $10,000 at a fixed interest rate of 4.05% for 1 year, to earn a guaranteed return of $412.

The small risk with a GIC is that you are not able to access the funds while they are held in the GIC, at least not without a financial penalty. This is the most basic type of GIC, however, there are more flexible versions.

You can choose the amount of time to invest in a GIC; usually 6 months to 5 years, and the amount of cash to invest, with some allowing an investment of as little as $100. The longer funds are locked in, the higher the interest rate offered. When the investment matures the principal plus guaranteed interest is paid out. Note that interest from GICs is subject to tax unless it is held in a registered account.

Here are 3 reasons to consider a GIC:

1. Use a GIC for a Short-term Savings Goal 

If you have a specific spending goal for the near future (1-5 years) like a wedding, major vacation, down payment for a home, post-secondary education, home renovation, vehicle or otherwise, a GIC would be a good place to consider investing your money before you need it.  

Holding savings for a specific, short-term goal in a GIC will: 

  • Provide a higher return than a high interest savings account. 
  • Will remove the risk of having it invested in the stock market, ensuring you have the cash on hand, even when markets are down. 
  • Removes the temptation to spend savings, since the penalty for withdrawing funds from a GIC early is a deterrent.  

2. A GIC can balance an investment portfolio  

GICs are considered fixed-income investments and can reduce risk and volatility in an investment portfolio. When markets are down some people feel better about investing a portion of their savings in a GIC, where growth is guaranteed.  

Balancing an investment portfolio with a GIC is especially useful for retirees, when income is fixed. In this case, even when markets are down, a mature GIC will provide cash while they wait for markets to recover. 

3. A GIC is Useful for Teaching Kids About Compound Interest

Teaching kids about saving and the magic of compound interest is a wonderful gift. If they have some money saved, consider purchasing a GIC on their behalf for 6 months or longer, depending on their savings goals.  

Each month, you can look at the interest gained and talk about how it will earn even more next month, thanks to compound interest. You could use a compound interest calculator to compare what they would have earned in a saving account versus a GIC. 


Final Word on GICs

While GICs won't make you rich, they do serve a purpose in certain situations. While you give up a higher potential for growth, in exchange you'll get your principal plus interest guaranteed when you need it. Cash on hand when you need it lessens financial stress and helps avoid having to borrow money to pay for planned expenses. If you want to know more about GICs, including the different types, current rates, pros and cons and even alternative solutions, book a complimentary meeting with me.