A Guaranteed Investment Certificate (GIC) allows you to get a guaranteed return on your money in exchange for giving up access to your money for an agreed upon deposit duration.
Essentially, you agree to leave your money in a GIC for an agreed-upon duration of time (e.g. one year), and at the end of the term, you get your money back, plus the interest rate that was agreed-upon. Sounds great, but it also means you may lose access to that money during that time period. GICs can be a great tool, but it’s important that you pay attention to the criteria and consider your financial situation before locking up your money.
When used correctly, GICs can give a solid guaranteed return, but you need to recognize the trade-offs.
Redeemable vs. Non-Redeemable Guaranteed Investment Certificates
With GICs, it’s important to read the terms of the agreemement to understand the terms you’ve agreed to – namely with regards to the implications of withdrawing early.
Redeemable or cashable GICs allow you the flexibility to withdraw your money from the GIC before your term is complete. Now depending on your specific GIC, there is often a closed period (typically the first 30-90 days) where you may be penalized for withdrawing (usually in the form of sacrificed interest). There may also be a reduced interest rate if you withdraw before the end of the term. Redeemable GICs allow for more flexibility, but as a result they often have a lower interest rate than non-redeemable.
With non-redeemable GICs, you cannot withdraw your money before the end of the term. There may be extreme exceptions to this (extreme financial hardship, death of the GIC owner, etc.), but in general that money is stuck in the GIC for the agreed-upon length of time. In exchange for this loss of access, non-redeemable GICs typically pay a higher interest rate than redeemable.
With both types of GICs, you have the option to renew the contract at the end of the term, but the interest rates will be adjusted to what’s offered at the time of renewal.
When is a Guaranteed Investment Certificate Right for You?
The biggest thing to consider when contemplating a guaranteed investment certificate is “will I need this money during the term of this contract?”
Because GICs can lock-up your money or penalize you for withdrawing early, whenever possible a GIC should be held until the end of the term. This means that you need to be willing to give up that money for the agreed-upon term.
As I see it, GICs are best for when you know you need the money at a specified date, and want it to grow in the interim. For example, when I was in university, I knew that the day I graduated my student loans would start to accrue interest. I knew the date that I would want to pay them back, but wanted to get some safe growth on my money before that date. I put my money in a GIC knowing that the balance would go up, and I picked a term that meant I had access to the money by the time I needed it. This is a great usage of GICs, as it provided safe, predictable growth, and I knew I wouldn’t need that money before that date.
GICs are best for the short- to medium-term (6 months to 2 years) when you know you will need the money on the other end. Some good examples may be saving for a house purchased you have planned more than a year out, or saving for an upcoming event (wedding, graduation, etc.). GICs provide a guaranteed growth, and you are confident you can give up access to that money while the interest accrues.
So think about if this fits your situation, and if so, GICs may be right for you.
When Not To Use Guaranteed Investment Certificates
Though GICs can be great, they’re not always right.
When You Don’t Know When You’ll Need The Money
Because GICs lock up your money, if you don’t know when you’ll need the money it could result in you having no access to the funds in the time of need. Imagine you have an old car that is nearing death – you don’t know when it’ll die, but you figure it’ll be in the next 2 years. You wouldn’t want to get a GIC in that case as the car could die before the term is complete. In this case, opt for a High-Yield Savings Account.
When You’re Saving for the Long-Term
GICs can have decent returns, but they’ll never be better than what you can get in the stock market. If you’re investing with a time frame of more than 3ish years, you’re better to invest the money. GIC rates can hit 4-5%, but the stock market has averaged ~10% over the long run. And when you’re investing for the long-run you can ride out any short term fluctuations.
Where to Hold a Guaranteed Investment Certificate
The last consideration is whether to hold a GIC in a registered account.
Registered accounts (e.g. TFSA) mean that you can reduce/eliminate taxes on the interest that you accrue on the GIC. That said, by holding a GIC in a TFSA, you can’t use that space for investments. You are also likely planning to withdraw the money at the end of the term, so you need to consider how that affects your contribution room.
If you haven’t used up all your TFSA room and are willing to accept the withdrawal implications, you can hold a GIC in a TFSA. But if either of these cases aren’t true, hold your GIC in a non-registered account instead.
Conclusion – When to Use Guaranteed Investment Certificates
A guaranteed investment certificate can be a great tool for building your wealth, but there are also some important considerations.
Think about what you’re saving for, when you’ll need it, and if you’re willing to lose access to the money. If based on all this a guaranteed investment certificate still makes sense, then go for it. Just make sure you read and understand your terms closely.
Understanding and taking advantage of the different financial tools is key for building your wealth.