# Where does a newbie start to invest?
### Baby steps forward ![image.png](https://files.peakd.com/file/peakd-hive/cinderclaw.gld/23zSFvgjFUHteTZKED9Sdr8HFn3GhsxLkF1zWbCmQm26XRDCjp7pkjfGtqP4LE9sEpn9j.png) If you read the first part of this series here you will see that the first step that I mentioned was to consider a basic old savings account. Boring. Predictable and accessible with the added benefit that its typically very easy to access the money if needed. Set up a regular investment plan to pay yourself first and you should have a little bit of investable money sitting there ready for a new adventure. Now I am **not** a financial planner and I can't legally give advice on what to buy. Consider this advice on something to consider when you do your own research or talk to a financial advisor :) If it was me looking for my son's who are still novice investors? I would look at three different pathways depending on their needs and goals. * GIC / Time Deposits * Mutual Funds * ETFs ### A quick overview of the three options. **GIC / Time Deposit**: This is almost as simple as a savings account. Place your money with a bank for a certain amount of time. For the time chosen you get a fixed interest rate and at the end of the time you get your money back plus interest. Generally the money is insured by the government against loss (at least in Canada, USA, and Philippines..the countries I know). The problem is that you can't get your money early if you need it. **Mutual Funds**: In this option you go to a bank and talk to a financial advisor. They will get information from you and put your money into appropriate, diversified, investments. There is usually a minimum amount to get started and that amount can be lower if you setup an automatic investment plan. **ETF's**: These are like mutual funds but they are traded on the stock exchange. Instead of getting a financial advisor at the bank you setup an investment account on your own. On the one side you pay less in fees than going through the bank (usually) but you also don't get the financial advice you would get at the bank. I suppose you get what you pay for. Each of those pathways has their pro's and con's but for this article I'll just like at GIC's / Time Deposits. I'll look at Mutual Funds and ETFs in different articles.

# Locking in the rate
Now I use the term GIC (Guaranteed Investment Certificate) and Term Deposit interchangeably. The names can very as in the Philippines I remember them being called Time Deposits but the idea doesn't change much. You lock in your money and get a fixed interest rate. However, not all GIC's are created equal. In fact there are many different types and varieties of them so always check out different issuers, different terms, different fine print rules and of course different returns. A few different types would be "Fixed term locked", "Fixed term cashable", "Rate increase", and "Market linked". For simplicity I'll save the **Market Linked** GIC for an entirely different post. They are very interesting but they are different enough that they need their own discussion. Of the ones that are left? It is much easier to compare: 1) Are they truly locked or can you cash out early? 2) Is the interest rate fixed or does it change over time? 3) Is the interest paid yearly, at the end of term, or something else?

### Fixed rate / Fixed term. These are the most basic version. Very simple. **Choose how long** They are usually offered in short term (less than one year) or long term (more than one year). Common terms are : **Short Term** * 3 month * 6 month * 9 month ![image.png](https://files.peakd.com/file/peakd-hive/cinderclaw.gld/23tcNzjr1hiYKiDWWh377wuYaMLZ9cg2RybPw8bUcvdGykKohHivPQYCKuMhfEVHHF8Cy.png) **Long term** * 1 year * 2 year * 3 year * 4 year * 5 year ![image.png](https://files.peakd.com/file/peakd-hive/cinderclaw.gld/23tHb6kVV3XPwBjzo8EPbZzWQRsny2SYebiQxuhpLHy2LN5FzrmHCkfZ7YHXzKaYajH8Z.png) **Very long term** * 6 year * 7 year * 10 year etc ![image.png](https://files.peakd.com/file/peakd-hive/cinderclaw.gld/23uFwpP2YRqCkcdvpVWYBLRncXkJAgXgBwmg8zMBprfdvSXzNDFuQQX1eQiJjocMLvxNp.png) But banks get creative on terms so other times may exist. Also the government may insure some rates and not others. The very long term GIC's may not actually be insured so always check the fine print and coverage details. Of course interest rates vary depending on the term you choose. **In general** the long term rates give better interest. **But not always!** If banks expect interest rates to go down they may give better interest rates on short term believing that you will have to get a lower rate in the future. If they believe that rates will go up in the future? Then usually you get better long term rates. Look at the above images I clipped from the EQ Bank website. Notice has the rate goes up little by little until the 5 year term and then drops off after that? Watch rates and consider carefully. Longer is not always better. Life has a way of getting in your way and needing money now but having it locked away for another 3 years could put you in a bad spot. Which is why there are

### Cashable GIC's Now a lot of people want their high interest but they also want to be able to get their money if they need it. Banks often offer **Cashable** products where you are able to get your money if you need it. The problem is that they often treat a cashable product as if it were a high interest savings account. Rates plummet. I just took a look and a cashable GIC was giving 1.5% interest which is about half of the actual fixed rate products. In fact I happen to know I can find a savings account with higher interest than a cashable GIC. Result: Do your own research but cashable GIC's tend to be more hassle than the are worth. If you truly need something to be cashable but also want to get the better interest rate? Well, setting up a GIC ladder is a popular option but it requires more work to setup and usually requires more money as well. Quick version: Assume you have $5000 to invest. Sure you could put it all in a 5 year GIC and get the best rate but you also have no ability to get the money before 5 years is up. Assume the same $5000 to start. You could put $1000 into a 1 year, 2 year, 3 year, 4 year and a 5 year GIC respectively. In this situation you have some of your money becoming available every single year. Sure most of your money is locked for longer but at least *some* is available on a shorter time frame. The nice add on for the ladder? Every year you can take the amount that is maturing (becoming available) and reinvest it in a 5 year term. That way you always get the long rate and have something available every year.

### Rate ratcheting GIC's These are sort of like a cashable GIC and they are less common but if they are available they may be worth looking into. The idea is that they give an interest rate that goes up the longer you hold onto the GIC. **Look at this offering from Meridian Capital** ![image.png](https://files.peakd.com/file/peakd-hive/cinderclaw.gld/Eo4JFhx9ZiXtc2aT9qaCj8Updj84iopstbeP4pkxkh62S4Qt6DLhrU8VyYVpfgNcVdb.png) You get a certain rate on year one, a better rate on year two and the best rate on year three. Typically you can take your money out once a year if you need it. Not cashable at any time but available once a year. If you don't need it you get a better rate the next year. If you do need it, you can take it out. In that way it is a semi cashable option. Good if you can't or don't want to do a GIC ladder. But again, look at rates and fine print, every offering can be a little different.

# A hidden issue
One thing that really needs to be considered when buying a time deposit is what happens when it matures (payout date). I have been burned on this before so here is a heads up to anyone looking at them. The bank has options on what it is going to do with your money when your time is up on the time deposit. My favorite option? ### Cash out to bank account. I like the simplicity. When my time is over give me my money and my interest. Then I can figure out what to do wjth my money after that. Spend it? Re-invest it? Move it somewhere with better rates? All up to me. **BUT** that also means I have work to do! If I don't do the work the money just sits there doing nothing until I get my decision making and paperwork done on new investments. ### Auto renew Okay. This one has burned me. One time I was on vacation and a 5 year GIC became due. The fine print on the contract was that I *could* request the money at the end of term and within 30 days after. However I wasn't in the country at the time. **What happened if I didn't request the cash?** They invested it in a term with the current rates for the same duration. By missing the deadline my money was locked away for *another five years!*. The rate wasn't terrible but I lost my opportunity to find a better rate or better fit investment. That didn't make me happy.

# When do I get the interest
When the amounts are small this really doesn't matter that much. However, as GIC amounts go up when you get your interest makes a difference! The most common times to get interest paid are either : * Annually or * At the end of term However, sometimes there are options for more frequent interest payments even monthly on some ocassions. Why does it matter? Assume $100,000 in a GIC paying 6% on a 5 year term. If it pays out monthly? That would be roughly $500/month in regular interest. Great for a pensioner as reliable income. If it pays out annually? That would be roughly $6000/year. Great if you need money once a year for someone who has a large bill annually like home or car insurance. If it pays out at the end of term? That could be $30,000 as a lump sum! A nice surprise amount to be certain but could be a nightmare for tax purposes. It gets more in depth especially when it comes to how things compound within the GIC but the take home message isn't to know exact details but rather that there are options and they should be looked at before making a final decision. Different options can fit different people better at different times.

# End of the day
Personally I like having GIC's as an option. They are predictable and reliable. However it is important to weight the *slightly* higher interest against the loss of flexibility. For smaller amounts like $1,000? I can get 3% in a savings account or 3.25% in a 1 year time deposit. * $30 / year and available anytime * $32.50 / year and I get it after 12 months. ***Is the hassles worth the extra $2.50?*** Honestly? Often it isn't and I tend to keep fairy large savings account balances. But consider this second scenario. I have $4,000 required for property taxes every year. Not having it when needed can be a major hassle and lead me to dip into my credit card which costs me a lot of interest. What do I do? I put money into a one year GIC one year in advance. I know I *cannot* touch the money until the day it comes due. I know the money **will** be there when the property tax notice comes. It makes things very predictable and that can be a great peace of mind thing for me. Always remember there are a lot of investment options out there. Some may not fit for a certain person at a certain time, but if you know about it then you have it available to you if and when it actually ***does*** fit. And hopefully now you are a little better versed in GIC's. A savings account alternative that locks your money away for some time in the future with the possibility of slightly better rates. Shop around. They vary. Thanks for reading.