A GIC Guarantees I'll Lose Money

It seems like a very secure investment. I don’t purchase them, but most people are encouraged to do so by many experts and bank employees.

A GIC is a certificate that guarantees you a certain return on your investment over a period. Say you go to your local Bank and give them $50,000 to invest for 5 years.

At the writing of this newsletter, most banks will give you 4% each year for 5 years.

So, on that $50,000 GIC you will receive $2,000. Sounds pretty good, but you’ve just lost money.

Let’s say you have other income or a job so you would have to pay taxes on that $2,000 bringing the actual return to about $1,500. That’s now a return of 3% in actual money on your return.

But there is another very big problem here.

Inflation will eat away at the value of that $50,000 after the 5 years are up. When the bank gives it back to you, your $50,000 would have lost some $20,000 in buying power. Inflation is the increased cost we pay to live. Food, housing, gas, car costs, tuition for your children, and most importantly all kinds of other taxes. Forget the fancy government formulas. The major thing we all pay more for every year that no one counts is taxes. Taxes on everything you buy, where you live and what you earn. In many towns and cities property taxes for example, have gone up over 100%. That’s not counted into the inflation number, but still, something you must pay.

Real food costs and housing has also gone up on average greater than 10% in my community.

There is one other far out risk to buying a GIC.

The bank can take your money and do pretty much anything it wants with it. Let’s say a developer wants to build an office tower with apartments on most of the floors. It needs 100 million dollars. The bank gives them the loan. To give the developer 100 million dollars in Canada, how much does the bank need in cash to support the loan? You or I would have to have the entire 100 million dollars to loan.

The Bank. Zero funds. Banks can essentially create the 100 million dollars of debt without needing the actual money. I don’t know about you but that makes me nervous.

How does that impact my GIC? Well, if something bad happens will the bank be able to give me back my $50,000. Most likely as there is insurance and government programs, but how solid are they?

So, I don’t do GIC’s. For cash I use 30-day Government Notes. Currently they are paying about 4.5% and I get my money back every 30 days. That lets me sleep at night and reduces my risk to losing it all significantly. With a conventional GIC I am 100% sure I will lose money. Why would I do that deal? Why are you?

If you have millions of dollars in GIC’s it won’t bother, you. If you don’t outlive your GIC money. If you are middle class, you will have to cut back on your spending or find something else to invest in. There really is no other choice. GIC’s are the silent killers of wealth for most of us. I’m just not playing that game.

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