When looking for a safe place to leave your money, two common options that arise are savings accounts or GICs. Both offer safe returns, but is it better to buy a GIC or leave your money in savings?
In general, GICs will give a better return, so long as you’re willing to lose access to the money. GICs will have higher return that a savings account, but you give up access to your money for the entire term. Savings accounts are lower return but allow full flexibility, meaning you can withdraw at any time.
Ultimately, GICs. vs. savings accounts will depend on your individual circumstances and goals.
Is a GIC better than a Savings Account?
Whether it’s better to buy a Guaranteed Investment Certificate (GIC) or leave your money in a savings account depends on your financial goals and risk tolerance.
- GICs: These offer a higher return but require you to lock your money for a set term. They are a safe investment option if you won’t need to access your funds for a while.
- Savings Accounts: These provide lower returns but allow full flexibility. You can withdraw your money at any time, making them suitable for emergency funds or short-term savings goals.
It’s important to understand each vehicle and understand your own circumstances.
Understanding Guaranteed Investment Certificates (GICs)
GICs will have a defined term and return that is communicated up front. For example, as of this writing, these are the Tangerine GIC rates:
When you select a GIC, you are committing to leaving the money in the GIC for the entire term specified, in exchange for receiving the provided interest rate. Now I will note that due to the central bank interest rate at the time of this writing (5% in March 2024), the GIC rates are likely higher than what you may see.
So, using the rates above, if you chose the 1-year term, you would deposit your money for 1-year, and it would grow by 4.40%. For example, if you deposited $10,000, one year later it the GIC would return $10,440. There are multiple options for what happens when the GIC matures, but if you were to take it as cash that would be your return.
The key thing to understand with GICs is that that money is locked-in if you want to get the full return. Depending on the terms of the GIC, you may not be able to withdraw the money at all (non-redeemable – see below). However, some GICs allow you to withdraw money before the end of the term (redeemable), but you will typically be penalized, and have to sacrifice some or all of the interest gained.
Understanding Savings Accounts
Similar to GICs, savings accounts will have a defined interest rate. But with savings accounts, you have the flexibility to deposit and withdraw money at any time.
Now the interest rates on savings account can vary wildly. Banks will also commonly run promotional interest rates. These will typically be for new customers for the first 3-4 months of having the account, at which point it will revert back to the normal rate. Here’s a comparison of various Canadian banks at the time of writing (March 2024):
When comparing savings accounts, it’s important to look beyond just the rate. You need to consider:
- The promotion and the terms/duration – does it last 4 months? Is it only for new customers? etc.
- The rates by deposit amount – often banks will offer different interest rates depending on the amount you’ve deposited.
- The fees – look for monthly fees, transaction fees, etc. This may negate any advantages an account has in increased interest rate
- Convenience – is an extra 0.25% in interest worth the effort of opening an account at a totally different bank?
Generally, savings accounts won’t make you money. You may increase the dollar value of your money through the interest rate, but most times this will barely be enough to keep up with inflation. Ultimately, money in savings will typically lose value.
Considering this, there are good reasons to keep money in a savings account. Money held in a savings account is easily accessible and allows for a lot of flexibility. This is great for:
- Emergency funds – Savings accounts allow ultimate safety and liquidity
- Short term savings – If you’re holding money in preparation for a big expense, a savings account is a great place to hold it for 3-6 months.
Otherwise, if you’re looking to grow your money long-term, you’re better to put it to work in investments.
Is it Worth Putting Money into a GIC?
The safety and security of GICs can make them a very attractive option. However, it’s worth considering the implications of this decision.
GICs offer ultimate safety. As implied by the name, they are guaranteed, meaning you are guaranteed to get the return that has been advertised. GIC values will not go down, and are even guaranteed by the FDIC. What this means is that even if the bank fails, your money is protected (up to $100,000). So, regardless of economic conditions, your money is safe.
Another thing to consider with GICs is that you have to give up access to your money for the duration of the term. You may not be able to withdraw early, and if you do you may be subject to penalties. GICs are not well suited if you think you may need the money before the term is complete.
Another consideration is the amount of return. Depending on the economic conditions, GICs may offer returns of up to 5%. But this needs to be compared to other investment opportunities. For example, index funds have historically returned ~10% annually. Now it’s important to note that stock market investments are subject to much more volatility, meaning it can be up 30% one year, then down 20% the next.
If you’re able to invest long enough to ride the ups and downs of the stock market, your returns will be much higher. But if you’re looking to protect and grow your money in the short term (<1.5 years), a GIC could be a better option.
When Should You Use a GIC?
Whether or not a GIC is recommended for you will depend on your own risk appetite and financial circumstances. Here are three circumstances where using a GIC may make sense.
When You Have a Known Expense
GICs are well suited for when you have a known expense in the short term (1.5 years out or less), or generally want to protect your money in the short term. This could be an expense such as a tuition payment for yourself or your child, a downpayment on a home, a wedding, or something else.
These expenses are typically large and have a known payment date. For example, you know that tuition is due before the first day of the semester. When this is the case, a GIC allows you to set aside the money in preparation for this expense. This money can then safely have some growth, while also preventing you from accessing it (and thus ensuring you don’t spend the earmarked money).
I took advantage of this to pay off my student loans. I knew my student loans would start accruing interest the money I graduated, so I deposited money into a GIC that matured about a month before the payment was due. This allowed me to get some growth on the money, while ensuring it was available when I needed it.
To take full advantage of this, you need to have the foresight to be able to deposit money in a GIC well in advance of your expense. Typically, longer terms will have higher interest rates, so if possible, try to deposit the money 6 months to a year in advance. As well, ensure that your maturity date is well in advance of the expense date (at least a couple weeks).
GICs can Help You Save Money
GICs can actually help you save money by protecting you from spending it. The nature of GICs means that you can’t withdraw the money before the term completes. If you’re someone who spends money whenever it’s in your account, GICs can be used to prevent you from spending.
When you deposit into a GIC, you lose access to the money for the duration of the term. This will prevent you from spending this money on things impulsively, as they money will be locked in.
If you want to use GICs for this purpose, make sure you’re thoughtful about the term durations you choose. You don’t want to run into a circumstance where you need money for a good reason, but you’ve got it all locked in GICs. In this case, using a GIC laddering strategy could be well suited.
GICs can be Used to Help Balance Your Portfolio
GICs can be considered similar to bonds in that they provide a fixed income. As we know, GICs won’t give high returns, but can be used in conjunction with other investments (e.g. stocks or index funds) to reduce your overall portfolio risk.
You could consider allocating a percentage of your portfolio to GICs. This prevents your downside in the case of a market crash, and can also create some cashflow. This can be used alongside bonds, or other fixed income options.
Adding GICs will help to lower the overall volatility of your portfolio, meaning your swings in value won’t be as drastic.
How Long Should You Hold a GIC?
GICs will have a lower return than investing in the stock market, but are much safer. Your personal investment horizon will affect whether or not GICs should be held long-term.
In the long-term, the stock market has historically greatly outperformed even the highest GIC rates. If your investment outlook is 5 years or more, investing in index funds will have a much better return compared to GICs.
However, in the short-term, the stock market can fluctuate greatly, dropping double digits in a single day. If you have a known need for the money in the short term (<3 years), GICs may be a better option that investing. This ensures that you won’t lose money.
With that said, as mentioned above, GICs can be used to balance your portfolio, and reduce your overall portfolio risk. So if used in conjunction with other higher risk and higher return investments, GICs held over the long-term can be a good way to introduce some safe, fixed income into your investment portfolio.
What are the Downsides of GICs?
Though GICs can be a valuable option, there are also some downsides to be aware of:
- Lower Returns – Historically the stock market has had much higher returns.
- Locked Up Money – GICs mean that you can’t access the money for the duration of the term.
- Fully Taxable – GIC interest income is taxed at your marginal tax rate, meaning it’s taxed higher than dividends or capital gains.
- Opportunity Cost – You may be costing yourself money by putting money in lower return investments.
- May Not Outperform Inflation – GIC interest rates may be less than inflation, meaning your overall purchasing power is decreased
- Minimum Deposit – GICs often come with a minimum deposit (typically ~$500), meaning it can be prohibitive for some people.
For more information on the downsides of GICs, see here: What Are the Downsides of GICs? 6 Things to Be Aware Of
What To Consider when Purchasing a GIC
Ultimately, if you decide that a GIC is right for you, there are a few things to consider:
Redeemable vs. Non-Redeemable
When you select a GIC, it will either be redeemable, or non-redeemable.
Redeemble GICs allow you to withdraw your money before your term is up. However, there is often implications to this. There may be a holding period (e.g. 30 days) for which you can’t withdraw. Or there may be a penalty meaning you have to sacrifice some or all interest earned. In general, redeemable GICs will have a lower return in exchange for this flexibility.
Non-Redeemable GICs do not allow you to withdraw your money early. There may be some extenuating circumstances where your bank will allow withdrawal, but generally the money is locked in.
When selecting redeemable vs. non-redeemable, make sure you consider how confident you are in losing access to the money. If you’re not confident you can give up access, I’d suggest looking at high-interest savings accounts instead.
Generally, anytime you select a financial product, you should read the full terms to understand all the implications.
Duration of Term
GIC terms can typically range from 3 months to 5 years. When selecting a term, there are three questions to ask yourself:
- Can I give up access to these funds for this entire term?
- If I’m planning for an upcoming expense, will this GIC mature in time?
- Is this the best use of my money over this timeframe?
Answering these questions can help guide your decision on term duration.
Which Bank to Purchase With
Lastly, it’s worth considering which bank to purchase a GIC with.
Different banks may have different rates, but sometimes the convenience can affect the decision more than the rate. For example, your home bank (where you do most of your banking) may offer a 3.5% GIC, whereas a different bank (that you don’t use) may offer a 3.75% GIC. It’s worth considering if the trouble of opening an account and transferring money is worth the additional 0.25%.
If you’re depositing $10,000, this means a difference of $25.00 in return (0.25% * $10,000). Consider if an additional $25 is worth the additional trouble compared to just depositing with your current bank. In many cases, the answer may be no.
Conclusion
Ultimately, deciding between a GIC and putting money in savings will depend on your individual circumstances, but hopefully you now have the information to make an informed decision.
The best thing to do now is take action. You’ll never know everything you need to know, but taking an informed decision and adjusting course is better than never starting at all.
If you want to learn more about GICs, check out these articles: