If you’re reading this, you’ve probably heard about GICs before, but you’re not sure if you should be investing in them, or which ones to invest in. So, let’s break it down.
There are many different investment options, and what you ultimately choose to invest in is going to be based on a few different things –
- The reason that you’re investing
- How long your money will be invested for
- What you’re comfortable with
For example – if you’re investing for retirement, you’re probably going to invest using a retirement account, like an RRSP or TFSA in Canada. In this case, your money will likely be invested for a long period of time, so you can buy investments that are likely to make you the most money over the long-term. So, if you invest in something that doesn’t grow very much over the next three years, it doesn’t really matter, as long as you see long-term returns.
On the other hand, if you’re investing for the short-term, like buying a home, you’re probably going to invest using a first time home buyer’s account, like the FHSA in Canada. In this case, your money may only be invested for 3-5 years, and you’ll want to make a return over the short-term and make sure that you’re not going to lose any money, as you don’t have many years to recuperate your losses.
So… What do you actually invest in? That’s where GICs come in as an option.
What Are GICs?
GIC stands for Guaranteed Investment Certificate – you put a set amount of money towards this investment for a pre-decided length of time, and you’re promised that you’ll get the money that you contributed towards this investment back after that time period is up, plus some additional interest.
A GIC is kind of like a savings account – when you buy a GIC, you definitely won’t lose the money that you spent purchasing it, and you will earn a set amount of interest. The big difference is that you have to leave your money ‘locked in’ the GIC for a pre-set amount of time. So, with a savings account, you can access your money whenever you want, but with a GIC, you can’t. With some GICs, you can’t access your money at all, and for others you can take your money out early, but you’d likely have to pay a penalty fee or forgo any interest that you earned.
This is because you’re essentially lending your money to the bank, or whichever financial institution is offering you the GIC. The terms of the investment state how long you’re lending your money for, which could range from a few months to a maximum of ten years. The reason that you’re agreeing to lend your money is because you’ll receive interest back as a form of payment, so at the end of the time period, you’ll get back your initial money and the interest agreed on.
The most obvious pro of investing in a GIC is that your money is guaranteed to grow, making it a low risk investment. The biggest concern people usually have with investing is the possibility of losing their money, and with a GIC you know that won’t happen. On the other hand, you also are putting a cap on how much your money will grow, as you’re also guaranteed to not receive any more interest than the agreed upon amount.
Typically, GIC rates are lower than average returns from the stock market, but higher than saving accounts, including high interest saving accounts.
When Should You Invest In GICs?
So, when should you invest in GICs? One example would be when you’ll need the money you’re investing within a short period of time.
For example, a short period of time could be when you’re saving up to buy a house. If you’re investing money to put towards purchasing a house within 5 years or potentially less, you don’t have the time to benefit from long-term investments that may give you higher returns. Although there are ways to make high returns within a short time period, they are also riskier options, and when you’re trying to buy a house, you don’t want to risk having no money left at all.
That means that a GIC might be something that you’d want to consider in this case. You know that you’re okay with having your money locked in for a few years to save up, you know that you won’t lose your down payment money, and you know that you’ll at least earn some additional interest on top of what you would if you just saved your money in a savings account.
On the other hand, if you’re considering which investments to buy when you’re looking to invest for retirement, especially if you’re still young and have decades until you’re retiring, a GIC might not be the top contender. In this case, you have years to invest the money, you don’t need it for much longer than five years, and you’re aiming for higher returns than GICs typically offer.
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