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GICs can help Canadians with their savings goals

(Special) – Canadians, it seems, want to save money but their financial habits are not supporting that desire.

A recent study by EQ Bank has found that the majority (64 per cent) of Canadians want to save at least $10,000 over the next five years despite having record levels of debt and concern over rising interest rates.

However, when asked where they would put an extra $100, 27 per cent said they would rather keep that money as cash. Only 16 per cent said they would invest in mutual funds followed by 14 per cent who said they preferred the safer option of putting their money into Guaranteed Investment Certificates (GICs).

“It is encouraging to see Canadians wanting to save for their future, but their habits don’t necessarily match up with their goals if money is sitting in cash,” Dan Dickinson, chief digital officer at EQ Bank, said in a news release. “GICs play an important role in Canadians’ saving strategy by offering security, peace of mind and guaranteed growth, especially during times of uncertainty in the market.”

Interest in GICs waned somewhat during the low interest rate environment of recent years but now seems to be coming back in favour with investors as rates start to rise.

GICs offer a guaranteed rate of return over a fixed period of time. They give investors a rate of interest, usually between one and five per cent, that is lower than many other types of investments such as stocks, bonds or mutual funds.

Most often they are purchased for retirement plans because they provide a low-risk fixed rate of return, and because they are guaranteed to be secure.

EQ Bank has launched a new GIC product that gives investors the opportunity to deposit as little as $100 and earn rates from 2.76 per cent on one-year term to 3.50 per cent on a five-year term on their savings.

“When you compare them with other fixed income investments such as Canada bonds and fixed income mutual funds they provide pretty good value,” Andrew Moor, CEO of Equitable Bank, parent company of EQ Bank, said in an interview. “However, it still pays to shop around through resources like rate hub to make sure you are getting the best rate possible.”

The nice thing about GICs is that you can use them for just about anything.

If you want to save for the short-term and just beat your bank’s savings account rate you can get a cashable GIC. If you want to save in a registered account you can get RESP, RRSP and TFSA GICs, and if you want to travel to the U.S. often you can invest in a U.S. currency GIC or other foreign currency GICs.

Some investors may feel GICs are too cautious because after taxes and inflation a GIC return doesn’t leave much purchasing power. Those willing to take on a bit more risk can look at market-linked GICs.

Market GICs are linked to stock market indexes such as the S&P/TSX or the S&P 500. They offer investors the possibility of market growth while still guaranteeing the safety of their initial investment.

There is always the possibility that the market could perform poorly and have no growth at all or, even worse, go down. In this case, the GIC could have no interest rate return. But like regular GICs, the original invested capital remains intact.

Inherent in this investment option are three key features that almost every type of investor needs: risk management, safety of principle and diversification.

Market-linked GICs are a growing area, particularly among aging boomers who are moving into retirement and need capital preservation but also are looking for growth opportunities. While they offer greater potential for returns they generally are not a liquid asset and should be part of a diversified portfolio containing other asset classes. Talk to a financial adviser to see how they fit into an overall investment strategy.

Moor suggests people should get familiar with GICs. “Spend some time educating yourself and comparing rates,” he says. “Generally they are not complicated. They are for everyone and can really help with your savings.”

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Talbot Boggs , The Canadian Press