A guaranteed investment certificate (GIC) is an investment option offered by lenders. The customer purchases the GIC and at the end of term receives the initial investment back plus any interest gained. Because a return is guaranteed, GICs do not offer as much in returns as other options such as stocks and bonds potentially can. As a result, you need to take steps to maximize the return you receive as much as possible. The following are 4 steps you can take to do exactly this.
1. Shop around for interest rate
For things such as mortgages and loans, it is customary to search for the lowest interest rate so more of your payments will go towards the principal amount of the loan. However, when it comes to an investment such as a GIC, you want the highest interest rate so your return will be higher.
To ensure you find the highest interest rate possible on your GIC, you need to shop around and consult with different institutions as opposed to settling for the first offer you find. These include banks, credit unions, and brokers. Big banks offer GICs but their rates are usually not as competitive and are not able to be flexible as they only sell their own products. If you insist on purchasing a GIC through a bank, check online ones. They are usually able to offer competitive rates because they have low overhead costs.
2. Choose longer terms
GICs offer different terms with some being longer than others, usually in one, three, and five-year options. While terms that are shorter will assist you to achieve short-term goals, the ones that go for longer will help you maximize your return the most.
The longer your GIC term goes for, the more interest you will accrue. Therefore, if you select a three or five-year investment and cash out at the end, you will obviously receive more interest on top of your original investment when compared to a one-year term. Some institutions even offer 10-year terms which will gain a lot more interest if you are able to have your original investment tied up for this long.
3. Do not cash out early
Whether you need money due to an emergency, wanting to complete home renovations, or make a big purchase such as real estate or a vehicle, it may be tempting to cash in on some of your investments. While you are indeed able to do so, there are consequences and when it comes to GICs, this may mean a lesser return.
If you are able to, always try to cash out at the end of the term that you agreed to at the time that you purchased the GIC. Cashing out early will result in you paying penalties that are deducted off your return. It will also mean you are missing out on interest earned. Consequently, at the end of the day, the GIC will hardly have been worth it since you will not have made much money if at all.
4. Ladder your GICs
If you are purchasing multiple GICs, making them the same term length will allow you a respectable return. However, laddering GICs will allow you to increase the return you receive in comparison.
GIC laddering consists of purchasing at different terms so they all have different maturity dates. When one term comes to an end you can either cash out or re-invest in a longer-term GIC. As a result, you are either able to increase your cash flow if needed or take advantage of GICs that have a longer term and therefore earn more interest.