How GICs can help you save for your short-term goals

by Ann deBruyn

Smiling man using his laptop at a table.

Photo by Oleg Magni from Pexels

Let’s talk about short-term savings. By short-term, we’re talking about putting away money for a few months, or even a few years, for a big goal, like a vacation, a wedding or a down payment on a home. Where should you put your savings so they’ll be secure and work for you?

When saving, you have several options, but if you want your money to work for you, hedge against market volatility and earn some interest, the often-overlooked GIC could be a smart option for Canadian investors of any age. They’re not just for conservative investors or retirement planning.

What is a GIC?

A guaranteed investment certificate (GIC) is a financial tool where Canadians can invest their money for a specified period of time and earn interest on the principal. GICs are issued by banks and trust companies, such as EQ Bank, and they’re considered safe investments because the issuers are legally obligated to return the initial deposit and (with a few exceptions, such as index-linked GICs) pay interest to the investor.  

How do GICs work?

When you buy a GIC, you deposit your money for a term ranging from 30 days up to 10 years. At the end of the term, you get back the principal plus interest earned. Some GICs pay interest monthly, semi-annually or annually throughout their term.

The different types of GICs

  • Fixed rate: The interest is fixed for the entire term of the GIC.
  • Variable rate: The interest rate is fixed to the lender’s prime rate, so if that goes up, so does the interest rate on the GIC.
  • Cashable or redeemable: These terms are used interchangeably, but they are different. Cashable GICs can be cashed in only after 30 to 90 days. Redeemable GICs can be cashed in anytime but are subject to early redemption rates. These GICs tend to have lower interest rates.
  • Non-cashable or non-redeemable: You can’t cash in or redeem these GICs until the end of their term. They’re less flexible than cashable and redeemable GICs, but their interest rates are often higher.
  • Market-linked: These are GICs linked to an index or a group/basket of stocks. Investors benefit if the market or stocks go up, but the return is capped at a percentage of the overall return. So, if the return was 15%, the return for the GICs might be 8% or 10%. On the plus side, investors won’t lose money if the market or stocks drop.

The benefits of GICs

You’ll earn more interest from GICs than you would from a savings bank account, so you can reach your short-term financial goals faster. You don’t need a large sum to get started—at EQ Bank, for example, you can invest as little as $100. And, as mentioned above, GICs are very safe investments, with guaranteed return of your principal plus interest.

CDIC protection

Another reason why a GIC is considered a safe investment is that it’s covered by the Canada Deposit Insurance Corporation (CDIC), a federal Crown corporation that protects eligible deposits at its member institutions in case of failure (it’s rare, but it can happen). Investors are insured for up to $100,000 per insured category, per depositor at each CDIC member financial institution. So, if you have $100,000 in GICs and no other eligible products, you would be insured for the full amount.

Low maintenance

Most GICs are set-it-and-forget-it investments that are easy to understand and don’t need a lot of maintenance. When a GIC’s term ends or matures, the money will automatically be deposited into your bank account. 

Flexible options

There are so many GIC options with different terms and interest rates that investors can pick the right one for their short-, medium- and long-term savings needs.

Hedge against market volatility

When you’re saving for an important event and don’t want to risk losing money due to market volatility, GICs are the equivalent of a security blanket for your portfolio. They can be a smart addition to the fixed income part of a diversified portfolio.

Can hold in different accounts

You can hold GICs in registered and non-registered accounts. Registered accounts include RRSPs, TFSAs, RRIFs and RESPs.

Are you ready to invest in a GIC?

EQ Bank offers a wide range of GICs, including registered and non-registered options with different terms, and it has some of the highest GIC interest rates in Canada. EQ also makes it fast and easy to invest in a GIC—you can do it online, no paperwork required.