How to Ladder GICs

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Laddering GICs is a great investment strategy to maximize your return and maintain the cash flow of your fixed-term investments. 

I was checking my EQ Bank accounts to update my net worth spreadsheets for the end of the month, and I noticed they’re offering a very competitive short term GIC rate! You can actually get the highest rate of return on the shortest term.

I keep most of my cash savings at EQ Bank because even their high-interest savings account offers 2.30%*. Occasionally, they offer promotional rates. I once got a 3-month GIC paying 3.00% interest! The more cash you have on hand, the more flexible you can be to take advantage of opportunities like this.

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You can purchase Guaranteed Investment Certificates (GICs) at almost any financial institution, so the strategy in this post will work no matter where you bank. However, EQ Bank’s 3-month GIC is currently the best rate I’ve seen! I immediately purchased a $1,000 GIC, and I think I will add a few more. However, I’m electing to ladder my GICs to maintain liquid cash in my EQ Bank Account. 

Laddering GICs is a great way to take advantage of the high-interest rates offered by GICs, without tying up too much of your cash at once. 

What are Guaranteed Investment Certificates (GICs)?

GIC stands for Guaranteed Investment Certificate and is a type of investment that has both a fixed term and a fixed rate return. For example, you might buy a 5-year GIC that pays 3.50% interest. This means in order to get the 3.50% interest on the cash you invest, you cannot touch your principal for the 5-year term.

GIC terms can range anywhere from 30 days to 5 years. Typically, longer terms offer higher interest rates as an incentive to keep your money invested longer. When a GIC term is completed, it is said the GIC has “matured”.

The interest your money earns in a GIC can be paid annually or at maturity. As your GIC earns interest, many will let you choose to either have that interest re-invested in the GIC or deposited into your bank account. I recommend re-investing the interest, so it can compound your investment. 

how to ladder GICs

Guaranteed Investment Certificates are a great way to earn a higher-interest-rate on your cash than you would typically receive in a traditional savings account. Most savings accounts pay 1% (or less!) in interest, but GICs can be up to 3% or even more. 

Why are GICs a good investment?

Whenever I sing the praises of Guaranteed Investment Certificates and Term Deposits, I often get a lot of clap back. People complain about the rate of return and the illiquidity of this investment.

It’s true you can earn a greater return by investing in the stock market, but it’s important to remember that sometimes the highest rate of return on your money isn’t always the point. Your money can still be working for you outside the stock market!

Cash is an essential part of any financial plan because it is risk-free. You should always have cash set aside for emergencies, as well as keeping cash set aside so not all of your money is at risk in the stock market. Cash is also the most appropriate way to save for short-term goals, or set aside money that you can’t afford to lose. 

GICs are great for:

  • earning a high rate of return on the cash portion of your financial portfolio
  • keep you from spending money you’re saving for a specific goal, like a house down payment or a vacation
  • a risk-free passive income source

What does it mean to ladder GICs?

A GIC Ladder is an investment strategy where you stagger your investment in separate GICs that mature at different times. This allows you to maximize interest earned while maintaining a greater degree of liquidity and cash flow. It also protects you against interest rate risk, if interest rates are changing. You can view the historical and predicted Bank of Canada interest rates here

For example, let’s say you have $5,000 to invest. You might be tempted to dump all $5,000 into a single GIC with the longest term in order to earn the most interest possible. However, you might be better off breaking the sum up into two $2,500 investments, or even five $1,000 investments and investing in GICs with different terms, or staggering the timeline when you make the investments. 

By laddering your GICs, you always have some money available if you need it, but you also get to earn a more competitive interest rate than you get with a simple savings account. 

Laddering GICs with different term lengths

One of the most common GIC laddering strategies is to invest all your money at the same time, but into GICs with different terms. 

  • $1,000 in a 1-year GIC
  • $1,000 in a 2-year GIC
  • $1,000 in a 3-year GIC
  • $1,000 in a 4-year GIC
  • $1,000 in a 5-year GIC

With this strategy, you will have GICs maturing every year. When each GIC matures, you can reinvest the money into a new GIC following the same schedule. If interest rates increase, you’ll have the opportunity to invest your money into a new GIC at a higher rate. If interest rates decrease, you still have most of your investment tied up at a higher rate. 

Because shorter-term GICs typically have lower interest rates (that’s why EQ Bank’s 3-month GIC rate offer is such a good deal!), there is some interest rate risk or loss by splitting up your investment into shorter-term investments. However, the tradeoff is more liquidity with your cash, which is not a perk that should be discounted. Money only has power if you can use it. 

Laddering GICs with the same term length

Alternatively, you can also stagger the GICs by simply buying them at different times. You can purchase GICs with the same term on your own schedule. In this case, you might choose a shorter term and buy your GICs on a monthly or quarterly basis. This makes the most sense for short-term promotional interest rates, like what EQ Bank is currently offering. 

Again, let’s pretend you have $5,000 to invest. You break up your cash and stagger the timeline of your investments as follows:

  • $2,000 in a 3-month GIC today
  • $2,000 in a 3-month GIC one month from today
  • $1,000 in a 3-month GIC two months from today

In this case, we’re assuming the high-interest rate offered for such a short term GIC is a promotional rate. We want to capitalize on that by investing our money sooner, in case they lower the rate. In the example above, all your cash will be invested within 60 days. Because the term is only 3-months long, your first GIC will mature within 30 days of investing your last!

When your GIC matures, you can reinvest the money following the same laddering strategy, or you can switch to the other template. 

When and where should I ladder GICs?

Because Guaranteed Investment Certificates are not liquid investments, they work best in long-term savings plans. GICs generally work best for cash you won’t need for 2+ years. These might be things like a house down payment, or your retirement savings. 

I keep part of my main Emergency Fund, as well as my entire Car Emergency Fund with EQ Bank. These are the balances I drew from when I decided to purchase some GICs.

As a general rule, I caution against tying up your Emergency Fund in a GIC. However, because a 3-month term is so short, I’m breaking my own rules here. I went ahead an bought a $1,000 GIC at the promotional rate, and I plan to buy two more for the same amount in a few weeks. I’m following the second strategy I outlined above, staggering the timelines of my investments so they mature at different times and I always have some cash in my account. 

I would not recommend depositing your entire $1,000 Emergency Fund in a 5-year GIC. However, investing $3,000 of your $10,000 Emergency Fund in a 3-month GIC probably won’t compromise your financial security. This, of course, depends on other factors, including how much cash you have elsewhere to cover the unexpected. 

 *Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.

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