What is a GIC?
A Guaranteed Investment Certificate (GIC) is a savings option where you agree to invest your money for a certain amount of time in exchange for interest on your money. It’s considered a safe investment because your principal is secure.
In most cases, you need to invest at least $500 and agree to leave your money alone for a certain amount of time – anywhere from 30 days to 10 years. Most GICs pay interest – and sometimes at higher rates than traditional savings accounts. If you need to access your money earlier than the agreed term length, most likely you won’t earn any interest. In fact, if it’s not a redeemable GIC, you may have to pay a fee or a penalty as well when taking the money out early.
Types of GICs
There are 2 types of GICs to choose from:
1. Fixed Rate GIC
The first type will pay you a set amount of money for the privilege of having your money for a certain period of time.
2. Variable Rate GIC
Depending on how well the stock market is doing, the second type will pay you a varying interest rate. With this type of investment you never really know how much you’ll earn in interest, you take a small risk to earn a bit more than you would with a fixed rate GIC.
In both cases your initial investment is secure.
Make sure to ask your financial institution a lot of questions before buying a GIC. In fact, shop around and compare options to make sure the rate you’re getting is competitive.
Why GICs?
GICs are a good option if you want to invest money into short-term savings. You can invest your money for as little as one month and still make money on interest. If you’re sitting on some extra cash and haven’t come up with a long-term investment plan yet, you can invest your money short-term until you’re ready.
You can also use a GIC to balance risk in your portfolio. If you have a fair bit of money in the stock market it’s a good idea to add in some low risk options. GICs are safe bets – much more so than stocks and commodities – since your principal is always guaranteed.
What’s in it for them?
You’re probably wondering how the bank makes money off of your investment, and rightfully so. Basically, when you invest money in the bank you’re lending them your money for a set period of time. Just like the bank charges you interest on a loan, you receive interest on the loan you provide them.
The bank, in turn, will lend your money out at a higher rate. This allows them to not only pay you, but make money as well. When you buy a GIC at any of the major Canadian banks, your money is insured up to a certain amount. However, if you buy a GIC in US funds, it’s not covered.
GIC Tips
- Ask yourself if you need access to your money or if it won’t be missed if it’s locked in (redeemable GIC = not locked in, Non-redeemable GIC = locked in)
- If you go with a Non-redeemable GIC, check to see what the penalty will be if you need to take out your money early.
- If this is your first GIC, opt for a Fixed Rate GIC that can offer you a guaranteed return
- Compare the GICs offered by different financial institutions, not everyone will offer the same interest rate.
- Ask questions and do your research – there might be better options out there for you
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