This blog was last updated in December 2022.
A term deposit (aka a guaranteed investment certificate or GIC) is a safe and simple way to invest your savings over a specified period to earn a guaranteed rate of interest.
Term deposits are easily accessible through your financial institution and can typically be set up online or in-branch in a matter of seconds. Your money is typically locked in for anywhere from 30 days to 5 years, so it’s important to ensure that a term deposit is the best option for you before committing.
When you should consider a term deposit
Term deposits are ideal if you have a primary objective of safety or income. Your principal investment is guaranteed, so you don’t need to worry about losing money. Also, you’ll receive an agreed-upon rate of interest, which is also guaranteed.
Term deposits are also a good choice if you have a shorter investment time horizon.
For example, you may be looking to invest:
- For one year, before you pay for your dream vacation
- For two years, until you have to pay for your wedding
- For four years, after which you’ll need to start paying tuition.
When you should consider a different investment
If you have an investment objective of growth and/or a longer time horizon to invest, a term deposit or GIC may not provide what you are looking for.
Likewise, if you need a higher rate of income, a term deposit might not meet your needs. There are other market-based investments that can potentially yield more income and more tax-efficiency, leaving more money in your pocket!
Also, if you need on-demand access (aka liquidity) to your funds, a term deposit may not provide it. Typically, you will pay a penalty to break your term deposit early. So it may not be flexible enough to suit your unpredictable life.
So chat with a trusted advisor to determine the best investment for your needs if you wish to:
- Invest for growth over the long term
- Receive more income than a term deposit can yield
- Invest with greater tax-efficiency
- Maintain on-demand access to your money.
What else you should know
Contrary to popular belief, term deposits do in fact carry some risk. If your financial institution were to fail, you could lose your principal investment. However, there is some protection for investors.
The Credit Union Deposit Insurance Corporation provides unlimited deposit coverage for deposits made at BC credit unions.
For chartered banks in Canada, similar coverage is in place through the Canadian Deposit Insurance Corporation, but it is limited to $100,000 per account.
This coverage is automatic when you place your deposit.
The take away
If you’re looking for safety and steady income, a term deposit or GIC may be just the ticket. If you have more long-term, growth-oriented objectives, speak to a trusted advisor to ensure you select the best option to meet your needs.
We recommend that you talk to your financial institution to get more specific advice. You can talk to a financial planner at Vancity about options relating to your situation. Not a Vancity member? Open an account today.