It is true that interest rates are going up as the Bank of Canada (BOC) begins to gradually normalizing the overnight rate. This means that the average depositor will notice better returns on their cash deposits, term accounts, and savings.
However, when compared to the 1980s and 1990s, the returns are still pittance. You might be thinking that there must be some better way of getting your money to work for you without having to dip your toe into the Toronto Stock Exchange or the New York Stock Exchange.
There is and it’s called guaranteed investment certificates, or GICs.
By navigating the GIC market – locating great rates, laddering, and going long – you can finally let your money work for you. You just need to know how.
Here are five tips to finding the best GIC rates in Canada:
1. Ditch the Big Banks
Most Canadians do business with a major financial institution – Royal Bank, Scotiabank, TD, Bank of Montreal, and a few others. But most of these banks do not offer competitive account rates, particularly when it comes to savings.
If you think you’ll find great GIC rates with the big banks, then think again.
Yes, it can be convenient to use your main bank, but then your investment opportunities will be minimized and your money won’t be working for you.
Ultimately, it is best to ditch the big banks when you’re plunging into the world of GICs. Try out online banks, community banks, and even credit unions.
2. It’s Time to Go Long – Go Long!
There is a common misconception that if you park your money into a GIC for an extended period of time – one-year, three-year, or five-year – that you will miss out on rising interest rates.
This may have been true years ago, but the flourishing competition in the financial services is not allowing the status quo to go unchanged. In other words, banks – large or small – are offering flexible GIC products that rise an a rising-rate environment.
Don’t be afraid to go long. You just need to ensure that you can afford to not have a significant amount of loonies and toonies for the duration of the GIC.
3. Pick a TFSA For Your GICs
So, what type of account should you select for your GIC?
Do you want a tax deferral known as an RRSP? Do you want a straightforward GIC? Do you want a GIC to put in your tax-free savings account (TFSA)? We suggest a TFSA.
By gaining one, two, or five percent interest on your initial investment, you don’t need to share a portion of it to the government. Who wants to give even more to the state? Answer: nobody.
4. Ladder Your GICs to Get the Most
If you’re fiscal neophyte, then you’re likely unaware of laddering, or staggering, your investments. But this is a simple trick that can enhance your investments.
Here is what you need to know about this process:
- Ladder your investments equally between several GICs.
- Reinvest a GIC’s maturity into five-year terms.
- Earn the highest interest rate of a long-term GIC.
- You can minimize the risk of interest rate decreases.
- If you need to have your GIC funds at some point, you can do it.
Now you know how to climb the ladder, or stagger in the market.
5. Never Cash Out Early
One of the worst things you can do with a GIC is to cash out before its maturity date. By doing this, you risk paying a hefty penalty. Not only does this eat away at any interest gains, but it also imbibes the principal.
Some may say to cash them outside, but you should never, ever follow this advice!
When you’re a sandwich investor – scared of entering the stock market but irked by poor returns on your savings – a guaranteed investment certificate (GIC) is your best option. It is safe, secure, and protected by the Canadian Deposit Insurance Corporation (CDIC). It may not seem sexy at first, but as time goes by, you can master the GIC market and get better returns without the risk.