If you have money in a savings account, it’s easy to leave it sitting there—especially if you’re not sure yet what you want to do with it. If you know you might need it soon, that’s a good approach. However, if you know you won’t need some of your savings for several months or longer, a Guaranteed Investment Certificate (GIC), also commonly called a term deposit, is well worth considering.

Here’s how GICs work, and what to consider before choosing the one that’s right for you.

What is a GIC?

A GIC is simply a type of investment that lets you invest money for a set period, such as 18 months (the “term”). You earn interest on your savings, and your original investment is protected. When your GIC reaches the end of its term, or matures, you usually receive your original investment plus any interest still owing. You can then use the money for something, move it to another account or reinvest it in a new GIC.

Here are the key things to know:

• Terms range from a few months to several years
• Interest rates vary depending on the type of GIC, the length of the term and the rates available when you invest
• Depending on the GIC, interest may be paid monthly, annually or when the term ends
• With a traditional fixed-rate GIC, you know the interest rate when you invest. That means you can easily calculate how much you will get back.

Why choose a GIC?

There are two big benefits of GICs that make them useful for money you’ve already saved toward a particular expense. Instead of leaving it untouched in your regular account, you can put it to work until you’re ready to use it.

1. Predictability: You know the rate, term and when you will get back your money, plus interest. This can be especially important when financial markets might be going through some turmoil.
2. Flexibility: You can choose a term that matches your savings goal. If you expect to need the money next year, for example, a one-year GIC could be the best option. If your goal is further away, consider a longer term.

GIC or savings account?

This is a very common question, and the main difference comes down to access to your money.

• Savings accounts: Typically you can withdraw your money any time you need it. That makes it a great place for emergency savings and money you expect to use soon. The interest rate on a savings account may change, however, and could be different from the rate available on a GIC.
• GICs/term deposits: You invest your money for a set period. In return you may get a different rate, but less access to your money until maturity. 

Many people do both. You could keep some money in a savings account for unexpected expenses and place another portion in a GIC for a longer-term goal. The important thing is to compare your options, rather than assume one will always pay more in interest than the other.

Can you take your money out early?

This depends on the type of GIC you choose.

• Cashable or redeemable GICs: You can withdraw some or all of your money before maturity, subject to its terms. There may be a waiting period, a lower interest rate or other conditions attached.
• Non-redeemable GIC: This term deposit generally requires you to leave the money invested until the term ends. You may get a different rate in exchange for that commitment, but you do give up some flexibility.

When investing in a GIC, it’s important to know when you can access the money and what happens if your plans change. In terms of how much of your savings to invest, you should ideally keep any emergency savings somewhere you can reach quickly, like a savings account, rather than in a non-redeemable GIC.

An example of a non-redeemable GIC is our 1-year, fixed interest Dasvandh Term Deposit. It offers a fixed rate, guaranteed return after one year. On maturity, investors get back their original investment plus interest. As it’s non-redeemable, your money is locked in for a year. With this particular GIC, on top of the interest investors receive, 10% of the interest amount gets donated to a Khalsa charity partner—at no cost to investors.

Could a GIC/term deposit be right for your savings?

A GIC/term deposit can be a good way to invest money already set aside for a planned expense with a fairly clear timeline of when you’ll need it.

For example, are you planning to buy a vehicle next year? If you already have part of the purchase price saved and don’t expect to need it for, say, 12 months, a 1-year GIC could be a good option.

The same idea applies to money being saved for a home purchase, education costs, travel, renovations or a large family celebration. The important thing is to align the term length with the date when you need the money.

Of course, plans can change. If you think you might need the money sooner, a shorter-term or redeemable GIC can give you more flexibility.

GIC “laddering” explained

A GIC ladder lets you divide the money among several GICs with different maturity dates, instead of putting all your eggs into one basket. For example, your savings could be paid back after one, two and then three years through three different GICs. This lets you access or reinvest some of your money, instead of committing everything to one long term.

What should you consider before choosing a term deposit?

Here are a few practical questions to ask yourself or discuss with an advisor:

• When will you need the money?
• How much can you comfortably set aside?
• Could you need to withdraw it early?
• Would a cashable or non-redeemable GIC better suit your plans?
• What term lines up with your savings goal?
• When and how will the interest be paid?
• How does the GIC fit with your emergency fund and other savings?

Taking a few minutes to consider these questions and think through your timeline can help you choose the best option, while still ensuring you have some savings you can easily access.

Find the GIC that fits your plans

Do you have money you don’t expect to need right away? Not sure which term or type of GIC is right for you? A KCU financial advisor can help you look at your savings goals, when you may need the money, and how a GIC could fit with your other savings. View current GIC offers and rates.

Ready for a chat? Book a no-obligation meeting with an advisor.