Are GICs a good investment?
What is a GIC? Guaranteed Investment Certificates are financial instruments sold at banks that offer you a higher return on your funds through interest.
Note: GICs are purchased and sold in Canada. The equivalent financial product in the States is called Certificate of Deposits (CDs).
Just like holding your money in a savings account, you accrue interest on your investment as a reward for letting the bank use your money.
The only difference is that GICs allows you to achieve a higher return of interest at the cost of locking your money up within these GIC agreements.
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Are GICs the right investment for you?
GICs range from a few months up to a few years with a minimum investment of $500. There are no upfront fees to purchase a GIC. Depending on which term you decide to buy, the interest rate can be either fixed or variable. The longer the term equals the higher the interest rate.
If you are wondering if GICs are the right option for you then ask yourself these questions.
- What is my risk tolerance? GICs are 100% safe which means your principal will not be at risk, but that also means you can’t expect to become a millionaire.
- Will I need this money anytime soon? It’s best not to lock your money up until all your urgent expenses have been paid off.
- Do I have any other funds if in case an emergency occurs during my term? Keep your emergency fund separate from your investment funds.
- Am I satisfied with the rate I will be getting for locking my money up? Does the interest rate that you will be getting seem reasonable?
- Are there better alternatives if I decide not to invest in GICs. Think Opportunity Cost. Where else can you invest this money if you decide not to invest in GICs?
- Will the rate that I will be getting cover inflation? You might be losing the purchasing power of your investment if your investment doesn’t cover for inflation.
Different Types of GICs
There are different types of GICs when shopping around at your local bank; redeemable and cashable GICs allows you to not pay any penalty fees or have any interest withheld if you decide to withdraw early.
Variable rate GICs are investment products that pay you the interest rate according to a certain benchmark (i.e. the stock market index). Your returns may fluctuate depending on how well the benchmark performs.
What happens if I withdraw my GIC before the end of the term?
Depending on the GIC and the branch that is offering this product, most GICs (with the exception of cashable and redeemable GICs) will result in a penalty and a loss of interest on your investment.
My experience with GICs
Do I recommend GICs? I once bought a GIC for a term of 14 months with a 2% guaranteed interest. Around the same time, I built up the courage to invest in the stock market and guess what? my investment of Suncor generated me a 5% return after a few months! GICs are a good option if you want to be 100% risk-free, but if you have the courage to invest in the stock market then your returns can be potentially be a lot greater!
Check out my blog post here if you are interested in investing!
Other Considerations with GICs + What is a GIC conclusion
Keep in mind about inflation when investing in GICs. With inflation being around 1-3% every year, the amount of interest that you will gain from your GIC may or may not cover the annual inflation increase.