When you can’t decide where to park your cash, indecision can cost you. Indecision is a decision in itself. I made this mistake previously. I like to have a high percentage of cash in my investment portfolio asset allocation because I like to take advantage of buying opportunities.
High Interest Savings Vs GIC
A few years ago, I left about $80,000 in my Questrade brokerage without collecting any interest because I didn’t want to lose a buying opportunity (this was sitting in there for over a year, unfortunately) and yet I was too lazy to put it in something that would realize better gains than 0%. Oops!
I should have parked my cash in either a high-interest savings account or a GIC. It was one of my major money mistakes, check out this post for more of my investing mistakes.
Leaving it in cash in brokerage is similar to leaving it in a chequing account to collect 0.01% interest and letting inflation just tear through and devalue your hard earned cash (even though you might have earned a free iPad or $350 cash for signing up for that chequing account).
Leaving it in a money market fund is also not preferable. Parking your cash in a high-interest savings account or a GIC is the way to go to keep your money safe until you need it.
What is a GIC?
A GIC (or Guaranteed Investment Certificate) is a contract where you lend your money to the bank for a specified term (it can vary anywhere from 30 days to 5-year terms) and in turn, at the end of the term on the date of maturity (or annually), you get the agreed upon interest income. You cannot redeem a GIC so if you need the money you can’t just cash it out. For many banks, if you have buyer’s remorse, you can cancel it one day after you purchase it, but that’s about it.
One way to optimize a GIC is to incorporate laddering your GICs. My mom basically did this when she ‘invested’ our money for us as kids. My mom was definitely very low risk with our birthday and special occasion money (from relatives and friends etc.).
One GIC would mature and she would put it in another GIC. We always had a few GIC’s going on with her ladder strategy. This reduces the interest rate risk. For example, if you buy a GIC for a 5 year term, the interest rate might go up or down (hard to know what it will be in 5 years) but if you put a few shorter terms alongside that 5 year term it will reduce your risk of locking in your money with a low-interest rate.
What is a High-Interest Savings Account?
A high-interest savings account (or HISA) is a savings account that gives you a specified annual rate that is calculated daily and may be paid out monthly. When you park your cash with a high-interest savings account you can take that money out anytime without having a penalty and the amount you get paid out (interest income) is calculated on the number of dollars you have invested each day.
Let’s say you have $10,000 in a HISA savings account for 25 days and the last 5 days of the month you take out $5000 of it. The 2.30% will be calculated for $10,000 for 25/365 days and $5000 will be calculated for 5/365 days.
Here are some examples:
- EQ Bank’s Savings Plus Account
- Canadian Tire High Interest Savings Account
- Motive Financial Savvy Savings Account
- Tangerine Bank’s Savings Account
Related: High-Interest Savings Account Rate Comparison in Canada
High-Interest Savings or a GIC?
The GIC rates in Canada will usually be higher than the HISA rate.
Here is a list of the best GIC rates in Canada by fellow Canadian personal finance blog, Million Dollar Journey.
Parking your cash with a GIC instead of a HISA is like the Stanford Marshmallow Experiment and the ultimate test for delayed gratification.
If you’re not familiar with the Stanford Marshmallow experiment it is a longitudinal experiment where they offered 1 marshmallow to children and two marshmallows if they are able to wait 15 minutes.
The children that were able to wait longer for their bigger treat were shown to have better life outcomes later in life. These were measured by SAT scores, educational attainment (e.g. level of education), and BMI (body mass index) scores.
If you are able to wait it out (e.g. depending on the term of the GIC, 1-year to 5-year terms) you get a higher interest rate compared to having the money in high-interest savings. So a 1-year rate of 2.76% with a GIC is better than a 2.30% you would get with a HISA, the 0.46% can mean a lot to someone who has $100,000 in cash- this equates to $460 a year.
The good thing is that both the GIC and the HISA are CDIC covered (Canadian Deposit Insurance Corporation) up to $100,000.
The Downside
The downside to both the GIC and HISA is that when you park your cash with either, the interest income is fully taxed at your marginal rate. So let’s say on $10,000 you earned 2.75%, or $275. That $275 is considered interest income and is taxed at your marginal rate.
If your marginal rate is 30% (arbitrarily) then 30% of $275 vanishes to the tax man at tax time. For a list of current marginal rates in your province or territory, check out TaxTips.ca. There are other more tax preferable investments, but they have a higher risk (like Canadian dividend income and capital gains from equities).
To avoid this downside, you can park your cash in an RRSP or a TFSA if you have contribution room to save on taxes. However, if you don’t have that much contribution room left, I would just pay the tax at the marginal rate and keep your GIC or HISA out of your RRSP than clog up contribution room in your RRSP or TFSA when it can be earning more than 2.75% in an RRSP or TFSA brokerage account.
You don’t want to be over contributing to a TFSA as you’ll find out months later and incur much penalty.
Also, for the GIC, if you think you need the money at any time in the short term then it is best not to get a GIC since they are non-redeemable. You also can’t add more money into the GIC anytime you like– unlike with a HISA. You’ll have to buy another GIC but it might have a different interest rate.
What Does The Fox Say?
I’m not really a fox but that song from 2014 was kind of annoying but catchy. I personally prefer to use a high-interest savings account to park my cash because I like the flexibility, but if I knew (with 100% certainty) that I didn’t need the money I would definitely keep it in a GIC.
A GIC is safe, secure, comfortable and a better place to park your cash compared to under your mattress if you KNOW you don’t need the money. Since the stock market is still very high I like to have my money accessible so that I can deploy the troops when necessary to buy more equities and dividend-paying companies.
You may also be interested in:
- The Best US Dollar Accounts in Canada
- Best High Interest Savings Joint Bank Accounts in Canada
- Scotiabank Ultimate Package Review
- Canadian New Bank Account Promos
What do you usually use to park your cash?
GICs or HISAs?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.
High interest savings or money market accounts in our taxable accounts. And although this would go against most standard advice, I do use stable value funds (GICs) in our tax advantaged accounts. It’s not the best place for long term money, but we are in a position that’s it’s more important to guard against losses than it is to make sure we don’t miss out on upside in riskier assets. Tom
i am about to write a post on this very subject and specifically stable value funds. they’re usually only available in the states in a 401k and they’re invested in short-term treasuries and feature a contract with an insurance company or bank to protect against rising interest rates (like right now). i’m trying to figure out how to get 2% inside a brokerage account like a roth or your tfsa. the one downside of a stable value fund is they’re not insured like a bank savings account.
right now we just use an online bank for our cash instead of cd’s, which are our equivalent of your g.i.c.’s.
@Freddy Smidlap- Interesting to hear the differences between the US and Canada! I’m surprised that they are not insured like a bank savings account- that would make me wary to invest in the stable value fund. Looking forward to read your post!
I’m the same way with this situation, if I know I won’t need a certain amount of cash for a while I would leave it in a long term GIC(or CD here in the U.S.) and for emergency funds I would put it in a HISA so it can build some interest. For funds you might need down the line but don’t know when you will need it, HISA is a better option for me too just because you won’t have to deal with possible withdrawal fees for a GIC.
@Kris- Are the rates in the US comparable between CD and high interest savings? Do you guys call it a HISA as well in the United States?
Hi GYM, I used to own GICs but I no longer do. I don’t like to “park” cash:)
But I do have an emergency HISA now thanks to one of your post!
@Caroline- Hehe, I know you don’t like to park cash- not even for a free credit card or free banking! 🙂 That’s good you have an emergency HISA now- but you have a lot of cash flow from different pots so you’re pretty safe.
Hi GYM, the GIC is similar to the CD in US. It looks the difference is: for CD, I can still withdraw before it’s mature, but there is penalty there, usually 3-month or 6-month interest. Right now, the interest rate is going up. Probably the high interest savings account works better than GICs. For emergency money, the high interest savings account is a good and safe place.
@Helen- Thanks for visiting and sharing the differences between GIC and CDs. I don’t have any GIC’s right now as I like to have access to my cash. I have a number of high interest savings accounts though.