Now more than ever, savers are being hailed and appreciated. Although some interest rates are still low, savers have more access to better products. However, does access to better products mean that savers need to pay extra attention to high-interest savings accounts? GICs and high-interest savings accounts have similar characteristics; however, they are not interchangeable. It’s important to understand the differences and how GICs can benefit savers far more efficiently than ever before.
Read on to learn all about GICs, how they work and how they can benefit savers.
GICs: What They Are
A GIC is a guaranteed investment certificate, which is a safe and highly secure investment with little to no risk. It functions similar to a savings account in that you can deposit your money into it and earn interest. However, once it is deposited, you must leave the money in the GIC account for a certain duration of time. If that money is taken out before this time, you will have to pay a penalty on it, depending on the GIC you have. Once you buy a GIC, you are making an agreement with your bank to lend it money for a specified time from a few months, up to five years. In exchange, that money earns interest. The longer your money is in the account, the more interest you will earn on it.
Benefits of GIC Rates
It’s to your benefit to take advantage of GICS as a secure place for savers to place their money. Here are the advantages to owning GICs:
- Guaranteed principal and interest: When you buy a GIC and hold it until the term ends, you are guaranteed a few things. First, principal is guaranteed on your GIC. Say you invest $500 in the account, you’ll receive $500 back. Whereas, if you invest the same amount of money into the stock market, you could end up with less than $500 in the future. Second, your interest rate with GICs does not fluctuate. If you buy a GIC rate of 1.5% for one year, you will earn 1.5% on the investment.
- Deposit insurance: GICs issued by large banking institutions are often also members of the Canada Deposit Insurance Corporation (CDIC). That means that your interest and principal rate is guaranteed up to about $100,000 in the event that the bank or financial institution fails.
- Short-term savings: Whether saving for a new car, college or a vacation, a short-term GIC can provide you with access to a higher interest rate than a regular savings account.
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