No matter what life stage you’re in, investments can help you get ahead and achieve your goals. But how do you know what to invest in, how to create a balanced portfolio and how to limit your risk? Starting with Guaranteed Investment Certificates (GICs) can be a great option for any investor.
GICs are often thought of as a tool just for established investors or those closer to retirement. While there’s no denying they benefit people who are in their golden years, GICs can be beneficial whether you’re in university, starting a family, growing your career or looking to make a life change, too. The “guaranteed” return is the key.
Let’s say you have your first part-time job and you want to get into the habit of saving. Or down the road, you want to save towards a wedding or vacation property. In many common scenarios, GICs can come in handy and provide you a path towards achieving your goals (while minimizing risk)!
Let’s take a look at why GICs are important at each stage of life.
Stage 1: Starting out with GICs as a first-time investor
When you’re initially building an investment portfolio, it can be an exciting time. The key to success at this stage is to lay the foundation for a healthy financial future, and GICs can play a helpful role.
Maybe you’re in the middle of a post-secondary education program and starting to earn a regular paycheque. You might want to squirrel some money away for a new car or to put an extra paycheque towards your university tuition, books or e-texts. With all of these newfound financial responsibilities, you’ll want to make your money stretch as much as possible.
Sure, the temptation to spend is everywhere, and it’s easy to use all your disposable income on clothes, food and entertainment. Unless you were born a super saver, it will take some time to form a saving and investing habit. If you’re finding it tough to save beyond the immediate needs, that’s when GICs can come in handy.
How GICs help first-time investors:
For young investors, making use of a TFSA by investing in GICs can be a good start to your flexible portfolio. GICs can be a great addition when starting out, as your income may be lower in these years. Looking ahead, the tax benefits of GICs purchased as part of an RRSP may be more advantageous once you have a higher income. (Speak with your advisor who can help crunch the numbers.) Plus, many young investors need access to cash a little sooner, and having TFSAs gives you that flexibility.
With a GIC, your investment is locked up for a predetermined period of time, but not “forever.” Whether it’s one, two or five years, your money will be out of sight, out of mind — so it will be hard to spend it. You’ll earn interest on your investment, and your principal is guaranteed — as opposed to riskier investments such as stocks.
How do you save money to invest? By automatically putting aside a set dollar amount from your paycheque, say $25 or $50, you’ll forget all about the money and be less likely to spend it. With this extra money saved, you can put it towards a GIC. Unless you have very aggressive goals, you probably don’t need to invest huge amounts at this stage. It’s more about getting used to saving and investing.
Stage 2: Big life changes ahead
Once you graduate from college or university, it’s onto the next stage in your life. You may land your first full-time job fresh out of school, start up a business, meet the right person and decide to settle down — or go on a remote-working experience around the world! Whatever your next step, it’s likely going to be life-changing, and that means you’ll start setting new short and long-term goals that will require extra money to achieve.
Common savings goals at this life stage include having enough money for an adventure-packed vacation or for the down payment on a home. You might start saving up for your dream wedding or need to renovate your hometo prepare for a growing family. To ensure you save enough at this life stage, set measurable, realistic goals that have a time-frame. For example, you might say:
I want to put at least $500 towards regular monthly investments in order to make a $40,000 down payment on a new house in five years.”
Improving your financial health is a journey. At this stage, work on getting better at managing your money, reducing debt, building up savings and growing your wealth. See how to address each step in this helpful article.
How GICs help during big life changes:
GICs are important at this stage because they make it easier to save for short-term and long-term savings goals. Growing your funds within a GIC can be even easier than with a savings account since your money is usually locked up for a number of years, and offers a higher interest rate.
Based on your goals from above, figure out how much you need to save from each paycheque. Then you can have the money automatically put in a savings account in order to buy a GIC once a year with the money you save. It’s that easy, and you could have the down payment saved up before you know it!
With busy lives and growing responsibilities, it can be hard to put money aside. Start with a pre-authorized contribution (PAC), which is a ‘no pain’ way to set it and forget it, with automatic deductions and deposits. Learn how to use PACs here.
Stage 3: Young and established families
Once you’ve been in a career for a few years, have made a more permanent home (at least for now), and are feeling a little more settled, it’s at this point that you might have also witnessed the benefits of budgeting, saving and investing.
You might have also started a family — and while children can be adorable, they can also be expensive! Thinking into the future, you might want to lend your kids a helping hand in saving up for their post-secondary education so that they aren’t burdened with a lot of student debt. While RESPs are an ideal way to save for your child’s education,GICs are a great supplemental strategy.
How GICs help families:
At the beginning, you may not invest a lot of your children’s money in GICs, but as they get closer to attending university, it’s a good idea to shift more of their money to fixed income, such as GICs. That way, they don’t have to worry about half of their RESP money going up in smoke if the stock market takes a nosedive when they eventually go to school.
At this stage, you likely still have quite a way to retirement and can afford the time to create a “laddering strategy” with your GICs. By spacing out the maturity dates on your investments, you’ll maximize returns over the long run and avoid risks associated with fluctuations in interest rates. When your GICs mature at different stages, for example, in 2 and 5 years down the road, you can reinvest that money.
Note that the longer the term, the higher the interest rate will be on your investment — so you can work with your advisor to find the right mix to match your goals. And in the event of a downturn in the market, which can happen over the course of a couple of decades, your GICs are much less volatile.
Stage 4: Nearing retirement and into your golden years
Although retirement may seem like a long way away, it will be here sooner than you think. In your 20s, 30s and even your 40s, you may decide to invest mostly in higher risk, higher interest equities. After all, you have a lot more time for that money to grow and weather any market storms. But as you inch closer to retirement in your 50s and 60s, you may choose to shift more of your investment money to fixed income including savings accounts, bonds and GICs.
Of course, RRSPs are also a great way for most Canadians to save for retirementat any age, and they can work hand in hand with GICs.
How GICs help with retirement:
By holding GICs inside your RRSP, you won’t pay any tax until the money is withdrawn. Since your retirement may still be a few years away, you might still be able to invest some longer-term GICs and benefit from higher interest rates.
Although the cost of retirement for everyone is different, you’ll want to invest more in GICs the closer you get to drawing down your funds. And when you do retire, you can also continue to invest in GICs using any money you won’t need immediately for living expenses. That way, you can continue to make the most of the more stable interest that GICs offer.
The bottom line on GICs
As you can see, GICs aren’t just for those in retirement. The stability they offer can benefit investors, young and old. Whatever your portfolio mix, the sooner you start, the better your growth potential.
Start by speaking with your ACU Financial Advisor who can learn about your goals, review your savings and investment potential, and walk you through the ins and outs of GICs. By investing today, you can reap the rewards for your short and long-term future.
To open a GIC, set up an appointment with your ACU Advisor today by booking time through the Digital Appointment Booking Tool.