How to Build Your Very Own GIC Ladder?

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The low-interest rate environment may be beneficial if you’re a borrower, but for savers, that’s another story. Low-interest rates are like a double-edged sword – while borrowers are enjoying record-low borrowing costs (we recently saw the lowest posted 5-year fixed mortgage rate in Canadian history), savers a struggling just to keep up with the inflation rate. Today you’ll be hard-pressed to find a savings account offering over 2 percent interest. If you’re a risk-averse investor looking to boost your returns, GICs are worth considering.

What is a GIC?

A GIC is a Guaranteed Investment Certificate. GICs are considered risk-free investments because they guarantee that you will receive your original investment in its entirety. The form of investment guarantees an investor a certain rate of return over a given time period. It is normally issued by banks or trust companies. GICs come with a low-risk profile, meaning at the time you pull your investment or it is returned to you, you are guaranteed to have at least the amount of money that you started with, if not more than that.

Should I Go Short-Term or Long-Term?

The interest rates on GICs work a lot like mortgages: the longer you lock-in, the higher the interest rate. The terms on GICs vary a lot: they can be as short as 90 days or as long as 10 years. With interest rates at a record low, you may be wondering if it makes to lock-in long-term with GICs. Unless you’re socking away your money for a short-term goal like a family vacation or down payment on a home, you’re probably better off locking in long-term. If you think you’ll need the money in the short-term, it makes sense to go with a short-term GIC or high-interest savings account. Sometimes there is very little benefit to locking in long-term, especially when the rate curve is flat. With terms as long as 10-years, chances are interest rates will rise between now and then.

GIC Laddering

With the interest rates on GICs so paltry, building your own GIC ladder is one easy way to boost your investment returns. When you build a GIC ladder, you spread your interest rate risk. Instead of locking in your entire sum of money when interest rates are low, you spread out your investment to (hopefully) benefit when interest rates rise. GIC laddering offers the best of both worlds: not only do you reduce your interest rate risk, you increase your investment liquidity as well.

Building a GIC ladder may sound complicated, but it’s not. To build a GIC ladder, divide your total investment by five and invest your money in GICs with terms ranging from one to five years. For example, if you had $10,000 to save, you would invest $2,000 in one to five-year GICs. Every year when one of your GIC reaches maturity, simply purchase a five-year GIC – it’s that easy!