Results of a study released in July again show that Canadians are shying away from the piggy bank. The national poll, commissioned by the Canadian Institute of Chartered Accountants, reveals that the number of Canadians who save more than 20 per cent of their income dropped from 14 per cent in 2010 to 11 per cent in 2012, while the number who saved less than 10 per cent rose from 51 per cent to 59 per cent, over the same period.
So, for this issue, I’d like to highlight a great savings/investment product – Guaranteed Investment Certificates (GICs) or term deposits, as they’re commonly called. As the name suggests, GICs provide guaranteed interest on your investment. When you purchase a term deposit for a certain amount from your credit union or bank, you are essentially loaning that money to the financial institution for a specified “term” or length of time. Terms may vary widely, depending on the product and financial institution, but generally, the longer the term, the higher the interest you will earn.
Term deposits generally have a minimum investment amount, depending on the product, and the schedule for interest payments can vary as well. You can expect term deposits to pay you more interest than a savings account (including a high interest savings account), but returns are less than for longer-term investments like mutual funds and stocks. A term deposit could be “locked in,” meaning you can’t access the funds until the term completes, or may need to pay a penalty to do so. Or, it could be a “redeemable” or “cashable” term deposit, allowing you to access the funds anytime you need it.
Why consider a term deposit instead of other savings/investment products such as high interest savings accounts, mutual funds, or stocks? Generally speaking, term deposits can be used for many purposes, but are ideal for short- to medium-term savings or investment goals. Your savings account, on the other hand, is suited for “rainy day” funds that you might need quick or immediate access to, while mutual funds and stocks make the most sense for longer term savings and investments goals, like retirement planning. Given that all these savings and investment options serve different purposes, consider including all of them in your financial planning.
I would recommend term deposits especially if you have monies available (in perhaps your savings account) or if you’re accumulating funds that you want to set aside and grow for specific short- to medium-term financial needs or goals. In addition to the higher interest paid compared to a savings account, putting your money in a term deposit decreases your likelihood of spending it on something else. If you’d like to use a term deposit to beef up your savings discipline, make sure it’s a locked-in GIC.
While research suggests Canadians are saving less, it is possible to reverse the trend. If becoming a “saver” is one of your financial goals, talk to your financial institution about how term deposits can help you realize this. We’ll be more than happy to help.
Kathy McGarrigle is chief operating officer for Coast Capital Savings.