What term should you choose for your GIC? It’s an ongoing dilemma. If interest rates are low, should you invest for one year with the hope that next year the rates will be higher? What happens if you invest for five years and the rates go up, trapping your investment at a lower rate? What to do?
The answer is a GIC laddering strategy. It allows you to invest for five year terms where rates are generally higher, but gives you flexibility because the investments are maturing each year.
The idea behind a laddering strategy is simple.
- Take the amount of money that you want to invest and divide it by five.
- Invest 20% for one year.
- Invest 20% for two years.
- Invest 20% for three years.
- Invest 20% for four years.
- Invest 20% for five years.
Each year 20% of your investment will mature. Reinvest that money for another five years. Over the course of five years all of your funds will be invested for five year terms, with 20% coming due each year. You can add more money at renewal each year.
Advantages of a laddered GIC
- You can access income at regular intervals if you need it.
- The longer term GICs earn higher rates, even if interest rates fall in the meantime.
- If interest rates go up, the GICs that mature each year can be re-invested at higher rates.
- Your investment income is more predictable.
- It answers the question about how long you should invest—the answer is always in the strategy.
Remember your GIC deposits at Servus, including the interest earned, are 100% guaranteed.