Deposit laddering: A smarter way to invest in GICs
If you’ve looked into investing in a Guaranteed Investment Certificate (GIC), you’ll know they’re a low-risk investment option that usually offers a more competitive rate than a High Interest Savings Account. In order to capitalize on the best rate, you need to lock your money in for the long haul — typically five years. But is it beneficial to lock in funds in today’s rising interest market?
With a strategy called deposit laddering, it can be. Instead of waiting for interest rates to rise, deposit laddering allows you to enjoy the benefit of a higher rate while accessing part of your money each year. The concept is simple — divide your total investment dollars by five, and deposit these smaller amounts into each of the one to five-year GICs that we offer. As each term matures, you can either choose to lock it in for another five years, or another term of your choice. That way, you’ll have a GIC that matures every year, giving you the option to access some of the money, reinvest what you have, or even add more funds to the maturing GIC.
What are the benefits of this strategy?
You’ll earn more interest in the long run
With current interest rates, and assuming rates remain unchanged, there is an approximately 45% difference in return within five years between GIC laddering and investing the lump-sum in your variable savings. That’s because when you consider the actual interest earned year-over-year the laddering strategy earns the average rate across all five terms. For example, based on the rates as of November 1, 2021, in the first year, your money will earn 1.40% interest compared to an average 1.00% rate for a variable savings account.
Money is still accessible when you need it
No one can predict the future. Your financial circumstances and savings goals will change over time, and you may need to access some of the funds in your GIC at some point. Deposit laddering keeps the ball in your court by giving you access to one fifth of your investments each year, without any penalties or costs. In addition, if you are living off the interest from your GIC portfolio, you can also structure cash flow to meet your specific needs.
You’re not as affected by the ups and downs of the market
Deposit ladders minimize the impact of rate fluctuations, but also allow you to stay current with market trends. Variable savings accounts will fluctuate, and even if you hold a single GIC, you’re limited to investing at whichever rate is offered when your investment matures. With deposit laddering, you don’t need to guess where interest rates are going. If rates go up, you will always have money coming due every year to take advantage of the rising rates. If rates go down, you benefit by having money invested for a higher rate in a longer term.
It’s a low-risk, secured investment
GICs are low risk because they offer a locked-in rate that is solely dependent on the length of term that you’ve chosen. In addition, at SCU, all deposits are guaranteed 100% by the Deposit Guarantee Corporation of Manitoba*.
If you’re looking for a low-risk investment strategy, deposit laddering is a great way to maximize your savings in a low interest market. We can help you build a savings strategy that works best for you. Call us at 1.800.728.6440 or fill out a contact form:
*Includes all savings and chequing accounts, RRSPs, RRIFs,TFSAs, and GICs.