Let’s talk a little bit about investing in GICs.
There are all sorts of reasons why you might put your cash to work in a GIC. Maybe you’re saving for a house, car, or hush money for the mob. Or perhaps you’re using GICs as a substitute for the fixed income part of your portfolio. Hell, maybe you just couldn’t say no to the nice lady at the bank who offered you a whopping 1.2% to keep your savings there for the next five years. That adds up to 6%(!) over the life of the investment. Oh boy!
Or you might be the average millennial who wets their pants at the thought of investing in anything more risky than a guaranteed vehicle.
I really hope it’s not that last thing, but hey. Like any of us have high hopes for any millennials.
(sighs) What’s up, italics man?
I’ve been informed you were born in 1983. That makes you a millennial.
Are you disputing your birth year?
I am no millennial.
Just embrace it, man.
How dare you. I hate them so much.
Are we going to keep doing this?
I dunno. What’s our word count?
Investing in GICs
There are plenty of reasons for putting your cash away in GICs. But are you really investing when you do so?
GICs are probably the most secure investment you can make. They’re guaranteed by the federal government up to $100,000. I don’t think anyone has lost any money in a GIC since banks failed in the 1930s.
GICs are locked in, but not really. All you need to do is pay a relatively small penalty if you want your cash out. If you’re earning a percent and a half on your principal, paying a penalty of a couple of months interest isn’t a big deal.
GICs are guaranteed, offer liquidity, and a return that barely hits inflation. Are those the characteristics of an investment? Or is it more of a capital allocation technique?
As I’ve touched on before, I think we pay altogether too much attention to the interest rate offered on our savings. The difference between even 1% and 2% is nothing, especially on the amount of cash most of us have on hand anyway.
Say you have $5,000 in an emergency fund, blatantly disobeying my ironclad rule of only leaving $1,000 in your rainy day fund. Invested at 0.8%, you’re earning a whole $40 per year. If you stick it in a GIC earning 1.5%, you’re earning $75.
If that extra $35 per year makes a difference, you’re doing personal finance wrong.
Even if you throw the money in a one-year Oaken Financial GIC (which won’t let you out unless you actually die), you’re still only increasing your earnings from $40 to $100. $60 is still $60, but big whoop. Especially when Oaken has a savings account that already pays 1.75%.
Get your money out of GICs
I don’t care if the market gives you bad dreams and you’re more scared of it than I am of bathing. You need to stop investing in GICs and get your money to work in something better.
Luckily, you’re here at Financial Uproar, which has suggested all sorts of alternatives over the years. I have some of my cash invested in private mortgages. You can either start a business or buy an existing one. You can buy real estate, or trailer parks, or a million other things. There’s no shortage of investment options out there.
Investing in GICs isn’t investing. Leave your cash in high-yield savings accounts, and invest the rest. Opportunity costs are very real. Don’t lose out by keeping your cash with a bank. Think bigger.