Millennials do not have it easy. In their lifetime alone, they’ve witnessed different financial crises, the dot com boom and burst, the stock market crashing, inflation soaring, the terrifying COVID-19 global pandemic, cryptocurrency fads and losses, housing becoming increasingly unaffordable, and interest rates going through the roof. If you’re a millennial, (that is, you were born between the years of 1980 and 1995), then you’re probably nodding your head in agreement.
You may also agree that growing your wealth, investing in the market, and building your savings all seem daunting and confusing. The prime rate is the highest it has been in a decade at 5.45% (revised on September 7, 2022) and interest rates are continually on the rise, so it’s normal to start worrying about your finances. An increase in interest rates makes borrowing that much more expensive, since you have to pay more in interest. However, there is a silver lining.
You see, while a bump in interest can be bad news for those with a loan or mortgage, it’s good news for growing your savings. This is because you stand to earn more on the money you put in a bank or financial instrument. Wondering how you could possibly risk investing in these volatile times? Well, there is a safe alternative that can give you guaranteed returns, called GICs. So let’s turn the “lemon” of a high interest rate environment into lemonade!
What is a GIC?
A GIC, or Guaranteed Investment Certificate, is a low-risk deposit investment with assured returns (principal and interest, if any) and a fixed term (duration). They are sold by Canadian banks, credit unions, the Government, and certain trusts. A reason that GICs are a secure investment is that they are insured by the bank as well as by the Canadian Government through the Canadian Deposit Insurance Corporation (CDIC) or a provincial institution. So, when you invest in a GIC, you can be sure to get back your capital as well as any interest you earn on that capital. Since GICs guarantee returns, they are a great way to save and invest, especially for specific financial goals and expenses.
What are some types of GICs?
Not all GICs are equal. Some offer higher interest rates, while others offer shorter terms. Some GICS give you the benefit of cashing out without penalties, while others offer tax-free growth. Knowing about the different types of GICs will help you get a better understanding of how they can serve your specific goals.
One of the most common differences between GICs is how their interest rate is calculated and whether it remains fixed throughout the term, varies through the term, or increases through the term.
Fixed rate GICs
In a fixed rate GIC, the interest rate remains the same throughout the term. This means that you will earn interest at the same rate, even if the prime rate increases. However, it also means that you won’t suffer if the prime rate drops. Fixed rate GICs are the most common as they offer extremely low risk. The only downside is that fixed rate GICs do not account for inflation, so you may end up with a lesser principal amount in the long term.
Variable rate GICs
Unlike fixed rate GICs, variable rate GICs have an interest rate that varies according to the prime rate. In these types of GICs, you can expect more interest if the interest rate increases. However, if the interest rate were to drop, you would find that the amount you earn as interest would also drop. These are riskier than a fixed rate GIC, but offer more earning potential if you’re open to more risk.
Escalating rate GICs
With an escalating rate GIC, the interest rate increases steadily as the term continues. For example, let’s look at an escalating rate GIC for a term of three years. In year one, your interest rate could be 1.2%, in year two, the interest rate would increase to 1.5% and in year three, the interest rate would jump to 2%. An interesting thing about an escalating rate GIC is that the interest rate increases most in the last leg of the term. This serves as an incentive to not cash out your GIC before the term ends.
Some other types of GICs include those whose returns are linked to a specific market or even a foreign currency:
Market or equity linked GICs
Thought GICs meant you won’t be able to take advantage of market highs? Think again. A market or equity linked GIC links interest payments to a particular stock market index. If the market performs well, you will earn interest. Conversely, if the market does not perform well, then you would not earn any interest. Of course, you would still earn back your principal, as that is a guaranteed return under a GIC. Note that the interest rate is only determined when the GIC term ends, that is, when it matures. So, this does involve some element of risk, even though your principal is guaranteed.
Foreign currency GICs
Foreign currency GICs use another country's currency as a denominator, instead of the Canadian Dollar. The most common foreign currency GIC will be a US Dollar GIC. Foreign currency GICs offer the advantage of buying foreign currency when exchange rates are favourable, or if the value of the Canadian Dollar were to drop in relation to the US Dollar. They are most often used by travellers or savvy investors who have an appetite for risk.
Another important factor that differentiates GICs is whether you can redeem your GIC quickly, or need to see it through until maturity to avoid paying penalties for early closure:
Redeemable GICs
Want to invest in a GIC and be able to access your funds when you need to? This is the exact reason why cashable or redeemable GICs tend to be quite popular as savings instruments. A redeemable GIC is one in which your money is locked in for a short period of time (closed period), after which you can redeem the investment or cash out whenever you need to during the term. Usually, for these types of GICs, the terms are short and only stretch to a year. The closed period (wherein your money is locked as an investment and cashing out would lead to penalties), is also typically 30-90 days. Once the closed period is done, your funds are liquid and earn interest as long as you don’t redeem them. This kind of ‘liquid investment’ offers a lot of flexibility. However, they typically (and understandably) offer lower interest rates.
Apart from all these classifications, different GICs come with different tax considerations:
Registered & non-registered GICs
What if we told you that you can get a GIC that can grow tax-free? Imagine, a guaranteed return and no taxes! You see, when you buy a GIC, it is usually held in a non-registered account such as a bank account or an account with any other type of financial institution. These investments will bear some taxation, as per tax laws and brackets. However, you could also choose to hold your GIC in a registered account with the Government through TFSAs (Tax-Free Savings Accounts), RRSPs (Registered Retirement Savings Plans), and RRIFs (Registered Retirement Income Funds). The drawback of course is that you would have to keep your investments locked in for a longer period to get the benefits of tax-free growth. Secondly, these accounts also have certain limitations on how much you can contribute, and various other considerations, so make sure you check all the boxes before rushing to invest in one of these GICs.
Finally, another consideration that can be used to classify GICs is how often the interest payments are made. Some GIC issuers may dole out interest payments every month, while others provide pay-outs every six months or even annually. Alternatively, you can also choose GICs that allow for the interest payment to be reinvested till the end of the term.
Why are GICs a good option for Millennials?
While a guaranteed return on your investment is always good news, GICs are also a great way to ensure you save for your life goals. These could be anything from a down payment on a house, further education, retirement, or your dream wedding. It could even be for smaller goals such as a vacation or buying a new car. With the rising cost of living and housing and events such as the global pandemic that threw everything into a state of uncertainty, GICs provide a safety net of sorts. As they are fixed for a term, you won’t have to worry about resisting the temptation to dip into them when funds are short. On the other hand, in case you’re facing a real emergency and need funds urgently, you know you do have something saved up beyond your emergency fund. Of course, we never recommend breaking your deposit and paying a penalty, but you do what you need to from time to time.
Why should I invest in GICs now?
Usually, the interest rate offered on GICs range from 1.5% to 3%. However, thanks to the increase in the prime rate, you can now buy a GIC for even higher than 4% (with some long-term GICs even offering up to 5%). To put it in more proverbial terms, you should ‘strike while the iron is hot’.
Which GIC should I pick?
Now that we’ve covered some of the different types of GICs you can choose from, why GICs could be a good option, and why now is the right time to invest in GICs, the obvious next question is ‘which one is the best’? The answer is, you need to pick the one that is most suited for your financial situation, investment portfolio, and financial goals. The best GIC is the one that is best for you, and our financial advisors and investment experts would be more than happy to help you pick the correct one(s).
Contact us today, and we’ll get you the right assistance you need to choose a GIC that works for you. Or, if you already know what type of GIC you'd like, you can apply online today!