**This is a sponsored post written by me on behalf of EQ Bank. However, as always, all opinions are my own.
A guaranteed investment certificate (GIC) is unlikely to spark an exciting dinner party conversation but when stock markets are reeling, like they were earlier this year, investors often seek safe havens to wait out the storm. Cash is king for those who don’t have the stomach to watch their portfolio plunge in value, and GICs at least offer the promise of a modest return.
Back in February 2009, when the global financial crisis had just about reached rock-bottom, 30-year-old me was scrambling to meet the RRSP deadline and bought a five-year GIC. It was a costly mistake in hindsight. The Toronto Stock Exchange surged ahead for the next five years, earning annual returns of 9.52 percent, while my five-year GIC earned an average annual return of 2.75 percent.
Instead of turning my $7,000 contribution into nearly $10,000, I only had $7,800 to show for my decision. At the time, though, I thought the GIC was a smart move because I had to make a quick decision on what to do with my contribution, and the stock market still looked downright nasty.
Why invest in GICs?
The truth is there’s nothing wrong with stashing your savings inside the comfort of a GIC. Here are four times when it makes good sense to put your money in GICs:
- When your entire portfolio is sitting in cash, waiting for “the right time” to get into the market.
If you’re the type of investor who can’t ignore the doom-and-gloom economic headlines, and who’s convinced that a market meltdown is always imminent, maybe the stock market isn’t right for you.
Having your retirement savings constantly sitting in cash and earning nothing is like sitting on the fence and being paralyzed to move for fear of making the wrong decision at the wrong time.
A GIC ladder, which might involve purchasing equal amounts of one, two, three, four, and five-year terms, will maximize your risk-free returns and still give you the option of dipping your toes in the market each year when one of the terms comes due.
- When your investing strategy boils down to chasing last year’s winning stocks or mutual funds.
If you’re the type of investor who’s constantly looking for the latest fad, you might be falling victim to the behaviour gap – the difference between investment returns and investor returns.
Consider that, according to DALBAR, from 1986 to 2016 the S&P 500 Index averaged 10.16 percent a year, but the average equity fund investor earned just 3.98 percent a year.
When you think about our poor investor behaviour, coupled with sky-high mutual fund fees (at least, here in Canada), those investors who just can’t help themselves might be better off parking their savings in the best five-year GIC and earning a guaranteed return.
- When you just can’t stand the thought of losing money in the stock market.
Some investors simply can’t stomach the fact that a stock portfolio may drop by up to 50 percent during a market crash. They can’t handle the volatility, and can’t stop listening to pundits and economists who constantly push the fear button.
There’s no sense trying to convince this type of investor about the merits of investing in stocks for the long run. A nervous investor is just the type to bail when the going gets tough – which is a disaster waiting to happen.
A GIC might just be better for peace of mind. One caveat is that you’ll need to save a lot more to make up for the lower returns of an all-GIC portfolio.
- When you’re retired (or close to retirement) and need to keep a portion of your portfolio in cash or guaranteed products.
Having all of your retirement savings in the stock market might make sense for a 30-or-40-something, but once you’re retired, or you’re close to calling it a career, you’ll want to keep three-to-five years of expenses in cash or GICs.
An investor who hopes to retire in a year could structure his or her portfolio in a way that places equal amounts (i.e. one-year of expenses) into a GIC ladder. The first rung of the ladder matures the year the investor retires, which then gets cashed out and put into a chequing or savings account to cover living expenses. Rinse and repeat each year, pulling one-year of expenses out of your stock portfolio to replace the five-year tranche of your GIC ladder.
Here’s an example to illustrate:
EQ Bank currently offers GICs with competitive interest rates and flexible terms. A retiree could take a slice of his or her portfolio, say $100,000, and implement a GIC ladder strategy that looks something like this:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||
| 1-year GIC | 2.76% | $20,000 | $20,552 | ||||
| 2-year GIC | 3.01% | $20,000 | $21,222 | ||||
| 3-year GIC | 3.25% | $20,000 | $22,014 | ||||
| 4-year GIC | 3.30% | $20,000 | $22,774 | ||||
| 5-year GIC | 3.50% | $20,000 | $23,754 |
To see how much you could be earning in interest, check out EQ Bank’s online calculator.
Final thoughts
I was quite happy to cash in my $7,800 GIC when it matured and put that money to work in the stock market. In fact, I’m an all-equities investor at this time. But many people are perfectly content having all, or a portion of their money in an ultra-safe GIC.
It might seem like investing in a GIC is akin to treading water after inflation and taxes rear their ugly heads, but interest rates have started to tick up and savers are beginning to take notice. They see that GICs can play an important role in their investment portfolio, no matter what age and stage you’re at in life.
There’s a renewed case for GICs, but ultimately you need to do what’s best for your portfolio and invest in a way that helps you sleep better at night.
Rates shown are in effect as of May 28, 2018 and are subject to change. For GIC terms equal to one year, simple interest is calculated on a per annum basis and paid at maturity. For GIC terms of over one year, interest is calculated on a per annum basis and paid either annually (simple interest) or at maturity (compounded annually). Interest is accrued for the entire GIC term. Non-Redeemable. For more GIC rates and information, visit eqbank.ca. EQ Bank is a trade name of Equitable Bank.
Raising financially savvy children is important to me and I’ve found that the best way for my kids to learn about money is to give them an allowance. One of the first questions my wife and I asked each other – after determining how much to give and how often – was whether the allowance should be tied to household chores, or given freely as a way for our children to learn about money with no strings attached.
Allowance tied to chores?
A survey conducted by the American Institute of Certified Public Accountants found that 89 percent of parents tied allowance to work around the house – the idea being that paying for chores is good training for the real world, where your compensation depends on completing assigned tasks in a timely manner.
Related: How to put your kids to work
Parents worry that if they hand out an allowance without asking for anything in return, their kids will become lazy and entitled. On the other hand, chores are something that everyone does to keep a household running. Parents don’t get paid for the regular work they do around the house, so why should the kids?
In his book, The Opposite of Spoiled, author Ron Lieber says that allowance money should be a tool for learning and nothing more. He says when parents tie allowance to the completion of chores, they make work the primary focus, not money. Parents can certainly help their kids build a strong work ethic by having them do all kinds of chores around the house. But they should do them for the same reason we do – because the chores need to be done, and not with the expectation of compensation.
“It’s a fine idea for children to learn a proper work ethic, but parents can teach it by paying for larger, once-in-a-while tasks that they might otherwise hire someone else to so.”
Lieber also brings up the point that if chores are tied to money, what happens when the child doesn’t want or need the money, and then decides to sit out his or her chore duty? You’re probably going to make them do the chores anyway, and then you’ve broken the connection between the chores and the cash.
Ok, so what happens when the chores aren’t completed or are done poorly? Lieber says there are plenty of valuable privileges that parents can take away aside from withholding money (screen time, play dates, cell phone use, driving the new car, going out).
As Gail Vaz Oxlade said in this Financial Post article, “I don’t believe an allowance teaches children entitlement: I think that comes from bad parenting.”
How much and how often?
When our oldest daughter turned six we decided to start her on an allowance of $5 per week. We found three large, clear plastic jars and labeled them Spend, Save, Give. Every Saturday morning we hand out five loonies and instruct her to put $2 into her spend jar, $2 into her Save jar, and $1 into her Give jar.
Our youngest daughter was more curious about money at age five and so we started her on an allowance then (without the jars). She turns six next week and I’d like to introduce her to the jar method.
It has been interesting to see how they each use their money. The older sister is a saver and has over $100 in her Save jar. Her younger sister started out as a saver but has quickly blown through the money in her piggy bank. I think the jar method will help her prioritize.
Next up for our oldest, who turned nine last month, is a bank account. Time to put that $100 into an account and teach her the value of interest.
Related: Where to find the best savings accounts for children
Lieber says that with children under 10 you want them to watch the money grow and strive for a goal, so they should have just enough to buy some of what they want but not so much that they don’t have to make plenty of tough choices.
Final thoughts
We want our children to be grounded and understand the value of hard work, and we also want to raise children who are smart with money. We consider these two separate qualities and that’s why we decided not to tie an allowance with chores.
Having a bit of an entrepreneurial spirit wouldn’t be bad, either. Consider the lesson Jake Johnson taught his 7-year-old son Liam about trading time for money.
“In our house, you get paid for recognizing a problem and proposing a solution. I’ve taught Liam that if he wants to make money, he has to pay attention to the world around him, identify a problem that needs fixing, and propose a solution. We then negotiate a payment.”
After noticing the lawn was full of dead leaves, Liam offered to clean up the leaves and negotiated a $10 payment. Then he noticed his grandparent’s car was dirty and he proposed to clean it for $5. He then leveraged that deal into cleaning his aunt’s car, too. Soon he was working on a business plan to take his car washing business to the rest of the neighbourhood.
What’s your take? Should an allowance be tied to chores?
This post is sponsored by RBC. All expressed opinions and experiences are my own words.
Like many Canadians, I belong to a lot of loyalty programs and have collected a ton of rewards points over the years. One knock against many of these programs is that it can take months, or even years, to save up enough points to redeem for something you really want.
Indeed, a recent report from Bond Loyalty showed that Canadians have nearly $16 billion in unredeemed loyalty points.
While there are a multitude of reasons why consumers might be holding onto their points – saving for a big trip, hoarding for a special purchase etc. – a big factor might be that they just don’t know what to do with them.
What we need is a rewards program that can help us redeem our points as quickly and easily as we are able to collect them.
To me, that starts with everyday purchases at the point of sale. I want the ability to redeem my points instantly for things I buy on a regular basis. Mostly so I don’t have to scramble for pocket change when grabbing my morning coffee, but it would also be nice for my rewards program to cover the cost of my weekend groceries or to pick up a restaurant tab from time-to-time.
RBC Payback with Points at Point of Sale
That’s why I was interested to learn about a new RBC feature that will allows clients with an RBC Rewards credit card to do exactly that.
With Payback with Points at Point of Sale, RBC leverages mobile payment technology to allow clients to pay for all or a portion of a point-of-sale purchase with their RBC Rewards points.
Payback with Points at Point of Sale is integrated into Samsung Pay for a seamless payment and redemption experience, and is also available in the RBC Wallet on all other Android and iOS devices. RBC is the first bank in Canada to offer this unique payment capability through a mobile wallet.
Lucky timing for me, I recently signed up for the
How does it work?
When using Samsung Pay, after swiping up for Simple Pay, a client will see the option to pay with their RBC Rewards points under their RBC Rewards credit card. Just set the dollar and point value you would like to redeem for your upcoming transactions.
For eligible clients with non-Samsung Android devices, the option to Payback with Points at Point of Sale will be available within the RBC Wallet immediately after the transaction has been made. Clients can then select how many points they wish to apply to their purchase.
For clients like me using Apple Pay, a push notification (if enabled) will be sent to your iPhone once the transaction has been completed. The notification will advise you that Payback with Points at Point of Sale is available for the transaction. Simply log into the RBC Wallet app and select how many points you wish to apply to your purchase.
Clients can also set up auto-redeem within the RBC Wallet to ensure their points are automatically redeemed with every Apple Pay transaction. Regardless of device (Samsung, Android, iOS) the client will be charged the full purchase amount and will receive a statement credit for the dollar value of points redeemed within 2-3 business days.
Final thoughts
How many of us have tried to squirrel away enough points for a dream vacation, only to get frustrated and give up, cashing in our points for a toaster or blender just to use them up? That’s if we don’t forget about the points altogether.
But the rewards landscape is changing and customers are demanding better technology, instant access, and more freedom and choice when it comes to redeeming their rewards.
RBC is at the forefront with this new feature that makes it easy for clients to earn points and use them like cash for more than just travel.
That’s a win for rewards fans like me who can’t always use points for a flight or hotel but who still want to make the most of this valuable currency.