Summer is just around the corner, and with that comes summer travels! If you’re financially responsible, you’ve probably saved for your upcoming trip using a high interest savings account. Hopefully, you also booked some of the trip using a travel rewards credit card to maximize your insurance coverage and rewards. Today, we want to introduce you to another tool you can use to save for your next trip: the GIC.
What is a GIC?
A GIC – or Guaranteed Income Certificate – is an investment vehicle with a guaranteed return. You invest your money with a financial institution (the issuer) for a set period of time (the term). In return, they guarantee the principal (the amount you invested) and the interest at the rate specified in your agreement. In the event that the financial institution goes under, there’s often a second layer of protection available in the form of deposit insurance. This insurance is either provided through the Canada Deposit Insurance Corp. (CDIC) or a provincial insurer up to $100,000. GIC terms can be as short as 30 days, and run all the way up to 10 years – it’s important to note that the CDIC only insures GICs up to 5 years, but generally with a longer term comes a higher interest rate. For the purposes of saving for a trip, we are interested in terms of one year or less.
There are three types of GICs: fixed rate, variable rate, and market linked. Fixed rate GICs are the most popular and guarantee a set interest rate. For example, if you invest $1,000 in a one-year fixed rate GIC at 2.10%, upon maturity you would get your $1,000 back plus $21 in interest. Variable rate GICs are tied to fluctuations in an interest rate benchmark, typically the prime rate of the financial institution. If you think interest rates will go up over the term of your GIC investment, you would stand to gain from a variable rate GIC. On the other hand, if interest rates decrease, so will your rate of return. Lastly, there are market linked (or equity linked) GICs. These GICs are tied to an underlying market tracking index with your rate of return determined by how the market performs. If the market does well over the course of your investment, you stand to gain. If, on the other hand, the market does poorly, your rate of return may suffer. Most importantly, you’ll never lose your principal with a market or equity linked GIC.
Using it For a Trip
GICs are a great choice when you have the money for a trip but aren’t yet ready to go. By investing it in a GIC, not only do you earn interest (souvenir money!) but it also removes the temptation to spend it – once your money is in a GIC, it’s locked up until the term ends. For example, if you have $2,000 set aside for a trip but are not planning on going until next year, you could put that money in a GIC and earn interest on the investment while simultaneously guaranteeing that the money will be available when the bill is due.
Most of us typically use a chequing or high interest savings account to save for a trip. Interest rates on these accounts vary, with chequing accounts having little to no interest (0.2% or lower) and high interest accounts coming in around 1.70% (though sometimes they have high-interest promotions). Because GIC rates tend to be higher than most chequing or high interest savings accounts, it’s worth considering next time you’re looking to save for a trip.
What are some ways that you save money for your travels? Let us know in the comments below!
Post written and provided by Ratehub.ca