If you’re a student or recent grad and have savings, you’ll probably want to know how they can be invested. There are countless options available, but what’s the right fit for you?
The first question to ask yourself is, “What am I saving for?” Are you putting aside money to take a trip with friends in a few years? Saving up for a house a decade from now? Or starting to plan for retirement?
Figuring out why you’re saving is important because it’ll affect how you should save. For example, if you’re contributing to a registered retirement savings plan (RRSP), you won’t need the money for decades, literally. In this case, you can look at choices such as mutual funds, index funds, or exchange-traded funds. With all three of these choices, you can gain exposure to the stock market.
Of course, the stock market can be incredibly volatile. And if you’re not saving with a long term horizon in mind, you might not be comfortable taking the risk that the market as well as your investments will decline in value.
GICs, which stands for guaranteed investment certificates, are savings products offered by most banks and credit unions. In exchange for the use of your money for a specific period of time, the bank pays you an agreed-upon interest rate. For instance, if you invest $1,000 in a one-year GIC that pays 1.50% per cent, you’ll receive the initial $1,000 plus $15 in interest at the end of the term. Depending on the type of GIC, interest can be paid monthly, semi-annually, or annually. You often need to invest a minimum of $500.
There are actually a few different kinds of GICs. For one thing, some GICs are non-redeemable. What this means is that once you’ve purchased it, the bank doesn’t have to give you your money back until the term is complete. (In practice, most banks will allow you to cash out early, although you may not receive any of the interest you earned.)
If you’re not comfortable with a non-redeemable GIC, you might want to consider a cashable GIC. These products come with a slightly lower interest rate, but you can redeem your investment early.
With both non-redeemable and cashable GICs, there are a wide variety of terms available. On the shorter end, you can find 30-, 60-, and 90-day GICs, which might be ideal if you’re saving for an upcoming purchase. There are also GICs you can buy with terms of 180 days and just under per year (364 days). On the longer end, you can purchase GICs with terms of anywhere from one to seven years. As a general rule, the longer the term, the higher the interest rate.
When you buy a stock, it can drop in value. There’s no one who will guarantee you’ll get your money back. With GICs, the bank issuing them promise to pay you back your investment plus interest. And in the unlikely event that the bank goes bust, your money is protected by government deposit insurance. If you buy a GIC through a bank, the Canada Deposit Insurance Corporation (CDIC) will protect your investment up to $100,000.
Keep in mind that deposit insurance does not cover two kinds of GICs: Those with a term greater than five years, as well as products denominated in a foreign currency (some banks sell GICs denominated in U.S. dollars).
Another option for saving without taking any risks is a high-interest savings account. These are like regular savings accounts but with a much more competitive interest rate. While you might receive 0.25 per cent in interest with a regular savings account, it’s possible to find a high-interest savings account that pays 1.50 per cent to 2.25 per cent annually.
Compared to GICs, the advantage with a high-interest savings account is that you always have access to your money. There’s no need to worry about your money being locked up for a set period of time. There usually isn’t a minimum deposit amount either so you can begin investing no matter how much you’ve saved.
It’s tempting to try to get a huge return when you start investing. But if you’d rather have the peace of mind that your savings are secure, give some thought to GICs and high-interest savings accounts. Your savings can grow and you won’t lose any money.