Building a GIC Ladder: How Canadians can maximize their savings
Imagine knowing your savings are safe and growing every year. In Canada, we look for stable investments due to changing economic times. Many choose Guaranteed Investment Certificates (GICs) for their secure returns. But, there’s a way to get more from GICs without losing access to your money. This method is called a GIC ladder. It’s a clever way to make the most of what GICs offer.
I have looked for ways to balance long-term safety with having access to cash soon. Through this, I found the GIC ladder valuable. It spreads your money across several GICs that end at different times. This gets you higher returns from longer GICs while keeping your investment safe. It also lets you benefit if interest rates go up.
What is the GIC Laddering Strategy?
The GIC laddering strategy is a way to invest by splitting your money into several Guaranteed Investment Certificates (GICs). Each GIC has a different term length. This method helps you get good returns and lowers the risk of tying your money for too long.
Let’s say you divide $25,000 across five GICs, from one to five years. In the first year, the return is 4.91%. By putting matured GICs into new five-year ones, your return could grow to 5.05% in year two. Over time, as you keep reinvesting, your savings will be in five-year GICs, raising your returns even more. This small step can greatly increase your savings.
This method has many long-term GIC benefits. You get higher interest rates like those from longer-term GICs, while still being able to access your money regularly. When a GIC matures each year, you can either invest in a new long-term GIC or take the money out without extra costs.
Using a GIC laddering strategy is key for a varied investment mix. It not only gives you more investment flexibility, but it also guards against changes in interest rates by having staggered maturity dates. Every year, as a GIC matures, you can adapt to interest rate changes and potentially increase your earnings over time.
Adding GIC laddering to your retirement savings or Registered Retirement Savings Plans (RRSPs) gives you stable cash flows. You also benefit from compound interest and delays in paying taxes. GIC laddering is a solid pick for long-term goals, even though you might look at more liquid options for short-term needs.
How to Build a GIC Ladder
Building a GIC ladder means you spread your investment for better returns and stability. You invest an equal amount of money into multiple GICs. These GICs have different ending dates. This way, you have GICs maturing regularly, keeping your money accessible.
Steps to Create a GIC Ladder
Start by deciding how much you want to invest. Split this amount to buy GICs of 1 to 5 years. With this strategy, every year, one GIC matures. You then reinvest into a new 5-year GIC. This keeps your ladder going.
Using GIC Ladder Calculators
Use online GIC ladder calculators to plan better. These tools show how your money can grow over time. They use current interest rates and your investment to display the future potential of your ladder. This helps in planning your finances accurately.
Choosing the Right Financial Institution
Picking the right place to invest is key. You can choose from banks, credit unions, online banks, and insurance firms, each with its perks. While banks are stable, online banks and insurance firms often have higher rates, which can help your investment grow.
Comparing GIC Ladder Rates
It’s essential to compare GIC rates before you invest. Typically, longer-term GICs, like those for 5 years, have better rates. Having a GIC ladder helps you benefit from these rates while keeping your money accessible. Stay updated on market trends to reinvest wisely and keep your portfolio growing.
Final Thoughts
Creating a GIC ladder is smart for Canadians who want to be financially stable and make secure investments. By spreading your investments across various GICs with different maturity dates, you can protect your money while earning more. This method offers higher interest rates and keeps your money accessible, which reduces the risk from changing interest rates.
GICs are very secure because they are protected by the Canada Deposit Insurance Corporation (CDIC). Each depositor gets up to $100,000 coverage in principal and interest. This makes GIC ladders appealing for investors who prefer to avoid risk. Unlike corporate bonds, GICs are a more reliable way to keep your capital safe.
For the best results with GIC ladders, it’s important to keep checking and comparing GIC rates. Consult a financial advisor to help you explore your options. Choosing the right bank and keeping up with the market will help your investments grow safely. By doing this, you can enjoy a regular income and be financially stable, showing the importance of the GIC ladder in your investment plan.
Ogunjobi Oluwamuyiwa Felix preferred to be called Muyiwa Felix, is a personal finance coach and Insurance advisor. He creates content that addresses the core of personal finance in Canada, the United States, and the world at large. Daily, he meets up with clients who are interested in financial risk management, income protection, wealth-building, retirement planning, and tax-efficient investing strategies.
