GICs: Are They the Right Place for Your Emergency Fund?

Lynn Martelli
Lynn Martelli February 15, 2024
Updated 2024/02/15 at 1:45 PM
GICs: Are They the Right Place for Your Emergency Fund?

A GIC (guaranteed investment certificate) promises to earn you a lot in interest. But is a guaranteed interest rate on deposits a surefire way to build your emergency fund?

When you have to keep your money in a GIC for a fixed length of time, this financial instrument might not provide the agility you need in an emergency fund.

While GICs are a great way to round out your investment profile, you should think twice about using them to hold your emergency fund. Here’s why:

What is a Guaranteed Investment Certificate?

A GIC is a deposit investment that’s available in Canada. In one critical way, it works like a basic savings account. You deposit your cash in a GIC, and your money earns interest.

Beyond those broad details, a GIC differs greatly from a basic account.

For one thing, it usually earns a higher interest rate than basic accounts. Today, some GICs promise to earn more than 5% for the duration of your term. Your rate won’t drop before then, even if the central bank lowers its prime rate.

For another thing, GICs also come with strict terms. Banks and credit unions will only guarantee such a high return by locking you in for a specific time period.

Terms may vary from product to product. Some may only last a year, but others last as long as five.

What is an Emergency Fund?

An emergency fund is a savings account that provides a cash cushion when things go wrong. It’s designed to help you handle unexpected expenses or interruptions in pay, and your usual cash flow of the month falls short of what you need.

With an ample emergency fund in your name, you’re less likely to rely on a line of credit when your car needs an urgent repair. At the very least, you may not think about getting a line of credit in Canada as often.

Accidents, layoffs, and household emergencies can happen with zero warning, often requiring immediate attention. Your emergency fund needs to be flexible enough to handle these urgent payments.

To be prepared for nearly everything, you should aim to save three to six months of living expenses in this account. While this may seem too big for an unexpected trip to the dentist, it’s there as a contingency plan for life’s biggest emergencies, too — like if you lose your job. With that much money set aside, you can job search for three to six months without worrying about bills.

What Happens if You Lock Your Emergency Fund Away?

Your GIC may not be completely off limits; you can withdraw your savings from this account before its maturity date if you have a redeemable GIC. Non-redeemable GICs, like their name suggests, can’t be redeemed before their maturity date.

An early withdrawal from a redeemable GIC usually comes at a price. Most banks and credit unions will penalize you for breaking your contract.

Generally, it’s better to keep your GIC where it is whenever possible to avoid this fine. But what if it’s an emergency?

In urgent situations, you should crunch the numbers to figure out how much an early withdrawal will cost you. Next, compare this fine to the cost of drawing from your line of credit. Using a line of credit might be cheaper, depending on the lender and your financial profile.

Keep this in mind when you’re searching for a receptacle for your emergency fund. You’re better off keeping these emergency savings in a high-yield savings account. Invest in a GIC when you’re sure you don’t need this cash before its term.

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