Summer vacation is over, and I hope everyone is refreshed and looking forward to the fall semester. I was on a co-op work term over the summer and not only did I learn a lot, but I also managed to save a tidy sum to help with rent and expenses over the next semester and beyond. However, the savings are now just sitting in my bank account and not really doing anything for me. I can’t invest it in the stock market because I need the money within the next three to eight months. This led me to consider buying some guaranteed investment certificates (GICs).
In short, GICs are low-risk savings products offered by most banks. Most GICs have a fixed interest rate, and a fixed term ranging from one month to many years. This means that you must commit your money for a certain period of time, but you have many choices with respect to the duration. In general, the longer the term is, the higher the rate of returns. GICs are insured by the Canadian Deposit Insurance Corporation for up to $100,000 each, which means your investment up to $100,000 is safe even if the bank issuing the GIC collapses.
To figure out how to maximize my returns while ensuring I have access to my cash when I need it, I looked at my monthly expenses and staggered a bunch of GICs based on that. Let me illustrate this by using a saved amount of $15,000 and monthly expenses of $1,500 as an example. I know that I will need the money progressively over the next 10 months, but a lot of the money will be sitting around for months.
I allocated $6,000 to a six-month GIC, $4,500 to a three-month GIC, and kept the remaining $4,500 in cash. With this setup, I will always have at least three months’ worth of expenses in cash on hand, and a GIC maturing once those three months are up. I could have been more aggressive and placed more in GICs by keeping less cash on hand, but having peace of mind is worth giving up on the extra bit of returns. In this example, I made the simplifying assumption that the minimum investment amount for each GIC is $1,000 or less. In reality, some GICs may require a minimum investment sum of $5,000. You will have to take this into consideration when planning.
In general, I think GICs are a great tool for putting your money to work in the short to mid-term. So if you are saving up for something in the not-too-distant future, have a look at GICs as a way to give those savings a little boost.