When it comes to saving money and earning interest, 2 popular choices in Canada are guaranteed investment certificates (GICs) and savings accounts. Both are good options for stowing away money for the short-term, but it’s important to understand their differences before deciding where to keep your extra funds.
GICs typically offer higher interest rates than savings accounts, so if you're planning to make a big purchase in a few years, a GIC can help your money grow. But if you need your funds to be easily accessible, a savings account is probably the better option.
Let’s go over the pros and cons of GICs and savings accounts, along with how to choose between them.
Key Takeaways
- GICs are best for when you're looking to save money for the future and can commit to not using it for a set period, allowing you to earn more interest.
- Savings accounts are perfect for stashing away money you want to keep safe but accessible, offering less interest in exchange for more flexibility.
- Think about your savings goals, when you’ll need money, and economic conditions when choosing where to park your money.
What is a GIC vs. savings account?
When you buy a GIC, you agree to lend your money to a bank for a predetermined amount of time – somewhere between a few months and several years. In return, the bank promises to return your money (plus interest) when the time period is up.
Depending on the type of GIC you purchase, you may not be able to withdraw your money before it matures without facing a penalty, so it’s only a good choice if you know you won't need to use the money for a while.
Savings accounts are another way to keep your money safe while earning some interest. Unlike GICs, savings accounts let you take out your money whenever you want without penalties, which is great for keeping money that you might need to use unexpectedly, like in case of emergencies or for short-term goals.
Advantages and disadvantages to GICs and savings accounts
Choosing where to keep your savings is an important decision that impacts your financial well-being and future goals.
Here are the key advantages and drawbacks of GICs and savings accounts to help you make an informed decision:
| Financial product | Advantages | Disadvantages |
|---|---|---|
| GIC | * Higher interest rate than savings or chequing accounts * Low risk - these funds are covered by CDIC insurance | * Funds are locked in for a set amount of time |
| Savings account | * Funds are accessible at any time * Low risk - these funds are covered by CDIC insurance * Higher interest rate than chequing accounts | * Lower interest rate than GICs |
How to choose between a GIC vs. savings account
Deciding between a GIC and a savings account usually comes down to a few key considerations:
- Are you saving for the short-term or the long-term? If you need an emergency fund to cover unexpected expenses like a car breakdown or flooded basement, a savings account is probably your best bet. If you know you won’t need the money for a while, a GIC will earn you more interest.
- Are interest rates expected to go up or down over the next few months? GICs typically offer fixed, higher interest rates, making them appealing for maximizing savings over time. On the other hand, interest rates on savings accounts are variable, so if interest rates are expected to increase, it may be worthwhile to put your money in a savings account to take advantage of higher rates.
Do you prefer a savings account or GIC?
Savings accounts and GICs both have pros and cons, and the right choice will depend on your financial goals, when you’ll need the money, and the state of the economy.
What has your experience been with GICs and savings accounts?
Do you prioritize the higher interest rates of GICs, or do you prefer the accessibility of savings accounts? Maybe you've found a creative way to use both to your advantage?
Share your stories, tips, and questions in the comments below. Your insights could help others make more informed decisions about where to keep their hard-earned money.
FAQ
What is the advantage of a GIC over a savings account?
GICs offer higher interest rates compared to savings accounts, providing a guaranteed return on investment for those willing to lock in their funds for a set period. This makes GICs an ideal medium to long-term savings strategy for low-risk investors.
Are GICs safe in a recession?
GICs are considered safe during a recession because they offer guaranteed returns, protected up to certain limits by institutions like the Canada Deposit Insurance Corporation, ensuring your investment remains secure even in economic downturns.
What is the difference between EQ bank GIC vs. HISA?
EQ Bank offers a 1 year GIC at an interest rate of 5.35%, while their EQ Bank Personal Account offers an interest rate of 3%, but these funds can be accessed at any time.
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