The Bank of Canada (BOC) is in the process of raising interest rates, but they are still standing at near all-time lows. And this isn’t good for your savings accounts, guaranteed investment certificates (GICs), or cash deposits (CD)s.
You may be a sandwich investor: you’re apprehensive of dipping your toe in the stock market, but you’re also frustrated by the lack of returns on your savings. What’s the solution?
Should you want to refrain from mutual funds, stocks, exchange-traded funds (ETFs), and the myriad of other high-risk investment options, then perhaps a GIC is your best option.
It is true that many may scoff at the notion of purchasing a GIC. However, by shopping around, doing your due diligence, and locking in a sum of money, you can witness your money working harder for you in today’s booming market. Here are five tips for buying GICs with the best GIC rates:
1. Lock in Your Rates for 3 Years?
The longer you lock in your GICs – one year, three years, five years – the better your rate of return will be. Therefore, you should purchase a multi-year GIC, right? Not quite.
It may seem counterintuitive, but you should keep the terms short. With the central bank likely to pull the trigger on one or two rate hikes this year, and moving forward, you don’t want to be stuck with GICs that have lower rates of interest.
Since the BOC will raise rates again, you should buy a GIC with a max term of one year.
2. Add the GIC to Your TFSA
There are two types of GICs: registered and non-registered. The former can benefit your tax situation, while the latter will tax your capital gains. To avoid considerable headaches with the Canada Revenue Agency (CRA), you are better off buying a GIC to add to your tax-free savings account (TFSA), which can also improve your rates.
3. Shop Around for Best Deals
Yes, you want to avoid complications, paperwork, and frustrations by allocating all of your investment products with one financial institution. But do you want to earn more money?
Like any other good or service in the open market, consumers often shop around for the best deals. Why not follow the same route with your GICs?
Poking around online, asking your branch, calling various banks. With some research, you could gain a few percentage points in your GIC returns, even if it is with a bank you don’t do have any previous pecuniary business with – do some of the legwork!
4. Pay Attention to Interest Rates
Reading newspaper articles about interest rates and listening to BOC governor Stephen Poloz can be undesired chores. But you work hard for the money.
One of the best fiscal steps you can take moving forward is paying attention to interest rates. Whether you are borrowing, investing or saving, you can be a smart consumer by knowing what the overnight rate will be, or if the central bank is increasing rates by 25 basis points.
This little bit of hard work will pay dividends down the road.
5. Variable vs. Fixed-Rate GICs
For the most part, GICs come with a fixed interest rate. This means, the bank will pay you a guaranteed sum for using your money during an agreed amount of time (90 days, six months, two years).
However, some financial institutions proffer variable GICs, products that are linked to indexes or markets, which comes with a bit of risk. These GICs pay varying amount of interest because it is based on how well or how poorly the stock market or index is performing. By selecting this type of GIC, you cannot accurately calculate how much interest you’ll receive when your GIC reaches its maturity level.
If the stock market soars, your variable GIC will likely outperform a fixed-rate GIC. On the other hand, if an index sputters along, then your fixed-rate GIC will offer better returns.
On one hand, Canadian consumers are more indebted than ever before. On the other hand, they still are concerned about the future, and if they can find any minuscule way to save something for their retirement, then they’d be happy. A guaranteed-investment certificate may not offer returns like that of bitcoin, Amazon, or a marijuana ETF, but it’s still better than nothing.