Investing - First Steps

The last few weeks we’ve been looking at retirement planning, and specifically RRSPs and TFSAs. Now it’s time to start looking at investments. Before you start buying things, you need to ask yourself some questions.

You need to know what is your timeline. When do you need this money? Is it for your retirement, or for your child’s education. What exactly are your goals? How much volatility can you stand? How much risk are you willing to put up with? All of these questions are critical when it comes to investing, and you need to know the answers to this before you jump in.

Generally speaking, the potential for gains is linked to the amount of risk.

For example, the safest thing you can do is keep your money in your bank account. This is horrible for investment purposes though. Right now I’m making .2% interest in my savings account. This means that if I have $1000 in the bank, by the end of the year I’ll have $1002 dollars. This isn’t even close to the rate of inflation, which was 2.36% from June 2013 to June 2014.

Of course, the advantage of keeping your money in a savings account is that it’s very liquid, you can access it easily and quickly.

If you want your money to still be virtually 100% safe but to earn more money, you may want to look at GICs. GICs are Guaranteed Investment Certificates, and like the name suggests, you are guaranteed a rate of return on your investment.

Here’s a list of important things to know about GICs from the website Get Smarter About Money

9 things to know about GICs

  • The minimum amount you can invest is typically $500. You don’t pay any fees when you buy a GIC.
  • Most GICs pay a fixed rate of interest for a set term, such as 6 months, 1 year, 2 years or up to 10 years.
  • The term ends on the maturity date.
  • Some GICs offer variable interest rates, based on the performance of a benchmark such as a stock exchange index. In general, the longer the term, the higher the interest rate you will earn.
  • You may get paid interest on your GIC monthly, every 3 months, every 6 months, once a year or only on the maturity date.
  • With some GICs, if you need to get your money back sooner, you will have to pay a penalty.
  • Other GICs — called cashable or redeemable GICs — allow you to get your money back at any time with no penalty.
  • Your money is protected, up to set limits, through the Canada Deposit Insurance Corporation (CDIC). This doesn’t apply to US dollar GICs or GICs with terms over 5 years.
  • You can hold GICs in registered investment accounts like RRSPs, RRIFs and TFSAs.

Taking a quick look at the rates of GICs, Scotiabank is currently offering a rate of 1.3% on a one year GIC and 2.3% on a 5 year.

You won’t get rich from GICs, I wouldn’t recommend that they become the main pillar in your investment strategy, but they have their uses. They’re useful if you can’t stand the slightest bit of risk in your investments, or if you have a short term goal. It pays much better than keeping your money sitting in your bank account.

Next week we’ll start looking at other investments like bonds, stocks and mutual funds. Any comments or corrections, please use the box below.