Achieving your short-term goals with high-interest savings accounts and guaranteed investment certificates

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Thoughtful financial planning is what will determine your success as an investor. A good rule of thumb when planning is to organize your financial goals into three planning time horizons. These horizons typically include short-term goals that you want to achieve in the next six months to five years, medium-term goals that you want to achieve in the next five to ten years and long-term goals that you want to achieve in ten years or more. Investors often use a variety of different investments for medium and long-term goals because they have a longer period of time to recover from potential downturns before needing their money. When looking at short-term goals, where you may need to withdraw sooner and cannot afford to lose money on riskier investments, there are a couple of options to consider.

Understanding high-interest savings accounts (HISA) and Guaranteed Investment Certificates (GICs)

Short-term goals might include saving for a down payment on a new car you want in a few years, an exciting trip to Hawaii or even establishing an emergency fund. Regardless of your short-term goals, HISAs and GICs enable you to generate returns on your principal without exposing your money to the risk of loss.

As the name implies, HISAs are savings accounts that generally offer higher interest rates than traditional savings accounts. Whereas a normal savings account may have an interest rate of approximately 0.5-0.8 per cent, a HISA may have an interest rate of 1.5 to 2.25 per cent. This may not sound like much of a difference, but if you saved $10,000 in a savings account with a 0.8 per cent return and another $10,000 in a HISA offering 2.25 per cent, after five years your HISA would have generated a whopping $770 more than the traditional savings account.

GICs are another avenue for investors to save for short-term goals. By purchasing a GIC, you are locking away your money for a set amount of time to receive either a fixed or variable interest rate. While these rates can range from approximately 1.5-5.00 per cent, depending on how long of a term you select, the money becomes inaccessible until the term finishes. If you need the money sooner, you will often need to give advance notice and pay a penalty that can severely negate any returns you would have made.

What should you consider before using a HISA or GIC?

With guaranteed returns, it may seem like HISAs and GICs are the perfect investment, but there are things to consider:

1) Open vs Locked-in: HISAs allow you to access your money when needed, whereas GICs have your money locked in. Make sure you assess whether the liquidity of your money is important. For something like an emergency fund, you want to make sure you have immediate access.

2) Fluctuating interest rates: During times of high inflation like we are currently seeing, the Bank of Canada increases interest rates financial institutions can offer to incentivize Canadians to spend less and save more. If inflation decreases in the market, you can expect interest rates to lower on GICs and HISAs.

3) Neither are ideal for medium to long-term goals: While they are less risky than other types of investments, HISAs and GICs interest rates rarely surpass inflation (the yearly increase in the cost of goods and services). So while they are ideal for short-term goals, the purchasing power of your money will diminish over the medium and long term by using HISAs or GICs exclusively.

HISAs and GICs can be powerful tools in helping you reach your short-term goals. By considering when you need to utilize the money and how readily you will need access to it, you can choose the suitable one for you.

 

Investing during uncertain times and high inflation

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For the past few decades the Canadian economy has experienced exceptionally low inflation rates ranging from one to three per cent. Unfortunately, Canadians today are challenged with a 30-year high inflation rate of 6.8%, with expectations that it will remain high through 2023. With rising inflation rates, how does this impact your income and investments? And what should you do?

What is inflation?

Inflation is a measurement of the increase in the cost of goods and services over time, which in turn impacts the purchasing power of your money. For example, an apple today could cost you $1, but the following year it could be priced at $1.07. In Canada, inflation is measured using the Consumer Price Index, which tracks the increase in the prices of goods and services across eight major categories. From April 2021 to April 2022, gasoline, food and shelter have all seen inflated prices that are more than double the Bank of Canada’s (BoC) benchmark goal of three per cent maximum. These rising prices mean that the quality of life for those with low, stagnant and fixed incomes will be significantly impacted, consumers will afford less goods and services, and businesses may generate lower profits. To learn more about inflation, please visit the Bank of Canada.

Why is inflation rising in Canada?

Inflation in Canada has been greatly impacted by both national and international pressures, such as:

  • record low-interest rates
  • government’s pandemic response to stimulate the economy
  • massive disruptions in the global supply chain
  • and the ongoing war in Ukraine driving up commodity prices

To slow down and reduce inflation, the BoC has begun increasing interest rates in phases, which discourages consumers and businesses from borrowing money and spending. While these increases put added pressure on businesses and families in the short term, if implemented correctly these can bring down inflation and stabilize markets too.

Investing during high inflation

During times of high inflation and uncertain global markets, it is not uncommon to feel anxious as you watch interest rates rise and some or all of your investments fall. Investors who have more experience and can tolerate more risk with their money may look for opportunities to capitalize on certain industries or investments that have outperformed during periods of high inflation. It is worth noting that the past performance of any investment is not an indicator of future performance. By attempting to change your portfolio to capitalize on different economic situations, you are exposing yourself to the risk of trying to time the market, which more often than not will have you underperform average market returns.

During bear markets (when markets decline by more than 20%), it is important to recognize how you may be feeling about your portfolio and revisit your financial plan and investments. If you work with a financial advisor, you may want to arrange a meeting with them to discuss the long-term view of your investments and how they are tracking towards your financial goals for peace of mind. For those without an advisor, remember that periods of high inflation may be temporary. Higher interest rates and recovering global economies may lessen the severity of inflation quicker than you think. Before you take any action, consider the time horizon of your investments and their underlying fundamentals. If you need more help assessing the long-term suitability of your investment portfolio and financial plan, you may want to talk to a financial planner or a registered financial advisor.

Without question, Canadians are facing challenging times. When it comes to your investments, stay focused on your financial goals and avoid the noise in the news and media. By maintaining a long-term view and a diversified investment portfolio aligned to your risk tolerance and goals, you can weather the storms of uncertain markets.