How to use Guaranteed Investment Certificate (GIC) Ladders

A GIC typically stands for “Guaranteed Investment Certificate.” It is a type of investment product offered by financial institutions, such as banks and credit unions. GICs are considered to be a low-risk investment because they guarantee the return of the principal amount invested, along with a fixed or variable rate of interest over a specified period.

Here’s how a GIC generally works:

1. Investment Period: When you purchase a GIC, you agree to invest a certain amount of money for a fixed period, known as the term. Terms can range from a few months to several years.
2. Principal Amount: You invest a specific amount of money, known as the principal, into the GIC.
3. Guaranteed Return: The financial institution guarantees the return of the principal amount at the end of the term. Additionally, you receive interest on your investment. The interest rate can be fixed or variable, depending on the terms of the GIC.
4. Redemption: GICs are not as liquid as some other investments. Typically, you cannot withdraw the funds before the end of the term without facing penalties. However, some GICs offer more flexible terms and early redemption options, albeit with reduced interest.

When you start saving, there is a generally a reason why you are saving. Everyone has their own priorities.

• Emergency Fund – This can differ for everyone. It may be 3-months of expenses, or 12-months for you. However, this fund you usually want it to be accessible to you at all times.
• Savings Account – Once you have an emergency fund you can also save it in a Savings account. The rates for most savings accounts is miserable. Your emergency fund generally will be a savings account or cash if you live in a country that is not safe or if you feel the you need some sort of money if you can’t get to the bank.
• Once your savings grow enough to cover your emergency fund, earning 1% in a savings account if you are lucky, is going to make your money lose to inflation, so you have to invest it somewhere. We won’t cover that in this article, we are going to focus on the emergency fund and savings accounts.

Why use a GIC:

• Currently money in a savings account pays 1-2% if you are lucky in Canada, that’s because the prime rate is pretty high.

Sounds simple from the table above, however, you don’t want your GIC locked up for a whole 12-months, otherwise you won’t be able to use your emergency fund when there is an emergency. Suppose you want to have $1,000 available to you each month to spend in case of an emergency for expenses. It makes it easier if you have a vendor who offers 30,60 and 90 day GICs. Here is an example:

$492.04 is 273% more than the $180 return from a savings account. The example above leaves interest rates unchanged through the example.