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Using GIC’s for your Short Term Savings

**This is a sponsored post written by me on behalf of EQ Bank. However, as always, all opinions are my own.

I get a number of daily requests for sponsored posts but I generally ignore them unless it’s a product that really adds value to the marketplace (or something that I personally use).

EQ Bank is fairly new to the scene and has been around since 2016. That being said, EQ Bank is a tradename of Equitable Bank. Equitable Bank is a federally regulated financial institution and is also a member of the Canada Deposit Insurance Corporation (CDIC).

EQ Bank wasn’t on my radar until I did some research for my article on the top high-interest rate savings accounts.  In terms of interest rates, EQ Bank offered competitive rates and not just for a fixed promotional period like other banks.

Upon further inspection of their products, they also offer some of the highest rates for Guaranteed Investment Certificates (GICs).

What are GICs?

You’ve probably heard the term GIC before and the product is pretty straightforward.  It’s a product you buy, your money is generally locked-in for a certain period of time (usually 1 to 5 years), and you generate interest on your capital invested. The longer you lock-in your money, the higher the interest rate.

GICs can be used to grow your money with a reasonable interest rate and very little risk.

They come in two different forms: redeemable and non-redeemable. Ideally, you want to keep your GICs invested until the maturity date so you don’t face any penalties, but if you had to pull your principal investment early, there are ways to do so. Just make sure you read the terms and conditions of the GIC before you commit.

Who should invest in GICs

If you need to save for the short term, then GICs may be a viable solution depending on your timing.  In my opinion, any cash needs within 5 years should be kept out of the stock market. Instead, the use of a high-interest rate savings account or a GIC as capital preservation is the top priority.

For example, if you are saving for a down payment for a home (or car) in a few years, then a GIC may be a good choice to optimize your investment return.

If you have a general emergency fund, then you may want to use a high-interest savings account instead because it is easily accessible when needed.

A prime example is with my oldest child going to post-secondary schooling in about 7 years.  A few years before he heads off to college or university, I’ll be placing a fixed amount into a short-term GIC.

GIC Rates

I did some poking around for GIC rates and not surprised to see that that EQ Bank offers some of the highest rates in Canada (as mentioned, they also offer the some of the highest rates for savings accounts). EQ Bank’s current GIC rates are listed below:

  • 1 year: 2.76%
  • 2 year: 3.01%
  • 3 year: 3.25%
  • 4 year: 3.30%
  • 5 year: 3.50%

Investing in GICs won’t make you rich, but that is not the goal of GICs.  It is a conservative investment which pays predictable interest.

Building a GIC ladder

I’ve written an article in the past about building GIC ladders to maximize the return of GICs while getting access to your cash once a year.

A GIC ladder is where you split your capital into equal portions and invest in GICs with variable terms/maturities (from short to long-term).

Instead of having all of your money locked up for 5 years straight, this will give you access to some capital once a year.

So in the case of EQ Bank, say I had $100k saved up for my child’s education and wanted to guarantee capital preservation but required cash every year for 5 years starting next year.  I would use a GIC ladder! I would split up the money in varying terms from 1-5 year GICs. This would look like:

  • 1-year GIC: $20k
  • 2-year GIC: $20k
  • 3-year GIC: $20k
  • 4-year GIC: $20k
  • 5-year GIC: $20K

Under this setup, I’ll have $20k cash available into my account every year for tuition while gaining interest on my capital.  In a real-life situation, I’m a bit conservative, so I would probably put $80k into a GIC ladder for 4 years while keeping $20k in a money market fund or savings account for variable expenses.

Final Thoughts

There you go, a summary of GICs and how to maximize them by using a GIC ladder.  One thing I didn’t talk about is taxes. In a taxable account, interest is taxed like salary, so if you are in the 40% tax bracket, $3,500 in GIC interest will result in $1400 in taxes.

**GIC rates shown are in effect as of May 28, 2018 and are subject to change. For GIC terms equal to one year, simple interest is calculated on a per annum basis and paid at maturity. For GIC terms of over one year, interest is calculated on a per annum basis and paid either annually (simple interest) or at maturity (compounded annually). Interest is accrued for the entire GIC term. Non-Redeemable. For more GIC rates and information, visit eqbank.ca.

Interest on the EQ Bank Savings Plus account is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 14 comments… add one }
  • Bill B gone July 16, 2018, 2:12 pm

    Hello, I have been reading your posts for a couple months now, good stuff. I only wanted to make one comment on this post. I am 47 and should be good to go for early retirement in the next 3-5 years depending on how I feel about it once my kids are gone off to school and I actually have more time of my own, opposed to driving them somewhere everyday it seems at this stage. I may not want to retire. Anyway, you made the statement that “Investing in GIC’s wont make you rich”. I have to disagree a little on that one. Although it may not have the upside of possible high interest rates that playing the market does, for those of us who are not big risk takers and who have been able to “oversave” and live below our means, GIC investments have worked out just fine. They are safe, there is some variety if you use some of the market growth GIC’s that most banks are now offering, based on markets with 0 chance of losing principal, but lower payout than if you were playing directly in market. Anyway, just wanted to point out that as much as rates are important, being able to save it first is where it all starts and gives you the biggest Bang. Cheers

    • FT FT July 16, 2018, 2:39 pm

      Good points Bill, thanks for your feedback. Can you tell us more about your journey to early retirement ? Retirement at 50 with a couple of kids is quite the accomplishment.

      • Bill B Gone July 16, 2018, 4:15 pm

        Thanks FT,

        It has been fairly straight forward for us. There has never really been a specific plan, just save more than you spend, simple. As a matter of fact, I have only recently been scoping sites like yours dedicated to FIRE and investing strategies such as Coach Potato Investing and others and find it fascinating to see what other people are doing, and maybe learn a thing or 2. For us, it was buy our house for way less than the bank said we could have, rapid weekly and doubled up payments right from the start, get it off the books ASAP. At the same time still manage to put what we could into RRSP. Once mortgage disappeared after 11 years, RRSP was maxed out in less than a year, followed by TFSA. Of course there was some company pension building at the same time. Again, as stated above, we were never risky investors, slow and steady with RRSP’s (exception being pensions and small amount of mutual funds). We are only now taking a portion of new annual RRSP contributions and playing a little bit in the market. All previous investments continue to roll into safe GIC’s. Again, not for everyone, but has worked for us. To be honest, my wife is the 0 risk one, I may have played market a little bit more, but in general we are on the same page. Thanks again, I will continue to read.

        • Finance guy July 18, 2018, 12:01 am

          A sincere congrats Bill to be in the financial position that you worked very hard to achieve. Exactly to your point, the most important point is to save more than you spend. The 2nd is to invest your savings wisely to achieve a risk-adjusted return you are comfortable with.

          For your consideration, given your investment time horizon is much longer than 1-5 years, if you are comfortable with slightly higher risk than a GIC, I would consider buying bonds of a Sched 1 bank (eg – RBC) or bonds of a blue-chip stable company (eg – Rogers). For example, it is extremely unlikely that RBC or Rogers will go bankrupt in the next 5 years (or frankly over a much longer time horizon too), but your return is substantially higher than GICs. For example, the yield-to-maturity of a Rogers bond maturing in March 2021 (just under 3 years) is currently 5.34% vs 3.25% for an excellent GIC with EQ, or a spread of 209bps. $1 compounded for 10 years at 3.25% is $1.38 vs $1.68 @ 5.34% on a tax-free basis. Being vigilant on your targeted risk-adjusted return is key. Hope that helps for your consideration and congrats again on your success.

          • Bill B Gone July 18, 2018, 3:17 pm

            Financial Guy,

            Ironically I have been reading a little bit on bonds as I noticed it as an option for investing through my TD self Directing account. It’s a little out of my comfort zone, mostly due to unfamiliarity, but worth exploring for a chance of squeezing a percent or 2 more on my returns. Thanks for the feedback.

            Cheers

  • Scott July 16, 2018, 4:15 pm

    I wish EQ would allow more than 5 GICs so that I could add to the ladder over time. Seems pointlessly crippled.

    • FT FT July 16, 2018, 4:23 pm

      Hope that eq reads this feedback !

  • Greg July 16, 2018, 6:06 pm

    Agreed that EQ is a good choice and has been competitive since started a couple of years ago. But “EQ Bank offered competitive rates and not just for a fixed promotional period like other banks” is a little rosy for an option only in it’s third year of operation. EQ started with a 3% rate and then lowered it twice to a not particularly competitive 2% in a few months after signing up a bunch of customers. A fixed promotional period would have been better than a secret promotional period I’d say.

    About a year ago in the midst of the Home Capital crisis EQ raised their rate to a market leading 2.3% and kept it there beating out second place today by 0.05%. But be ready for rates leaders to change at any time, sometimes quickly by large margins.

    Oaken beats EQ for 1 and 2 year GICs and matches on 3-5 years currently if you are shopping around.

    Here is a good place to keep track of all this, it would be a great reference to add to your posts on high interest savings and GICs. https://www.highinterestsavings.ca/

  • Laura July 17, 2018, 10:52 am

    Great article. I usually use high interest savings accounts rather than GICs for money I need in the short term since the rates are usually low but these are pretty reasonable!

  • Owen @ PlanEasy.ca July 17, 2018, 11:12 am

    We keep a small portion of our portfolio in a 5-year GIC ladder. We include it as part of our fixed income allocation. Most of that allocation is in bonds but at the moment the yield to maturity on many bond funds is close to that of a 5-year GIC (around 3%). We like the idea of having a small portion of our portfolio in a guaranteed investment.

  • Ken July 18, 2018, 12:34 pm

    There won’t be any TAX if you put the money under TFSA GIC account. Please correct me if the statement is wrong. Thank you!

    • FT FT July 18, 2018, 2:03 pm

      That is correct Ken.

  • Max July 19, 2018, 10:30 am

    Just looked up this bond.. The original yield on this bond was 5.34%.. However if you buy it now it will cost you 107.3 (per 100 par value), resulting in a yield of just 2.5%…

  • SmilingSaver July 19, 2018, 1:22 pm

    Hey FT.
    So question.
    Does the investment into the GICs work when used with Smith Maneuver?
    Then the HELOC interest is tax deductible and you are guaranteed not to lose money on your investments?
    And with ladder approach you can use the interest to make extra payment and put the principal back into the ladder.

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