Throughout our financial lives, it’s likely we will have a variety of short, medium, and long-term savings goals. For each of these money goals, your investing strategies will differ.

If retirement is still in the distant future for you as it is me, *sigh*, then it’s best to save by investing in the stock market within a registered account. Generally, most long-term financial goals should grow within the stock market due to the increased returns and the fact that your time frame will protect you against any short-term market volatility. 

While saving for retirement is important at any age, you may be prioritizing your money on other financial goals in the near term, such as purchasing real estate. You should treat these goals differently because you are subject to the ups and downs of the market. 

 In addition to short-term goals, it’s important to have an emergency fund worth three to six months of your living expenses. Typically, it’s not always best to keep your emergency fund in the stock market. But, you also don’t want to keep the money under your mattress or in a checking account that doesn’t earn any interest.

For example, say you quit your job at the end of 2019 to travel the world throughout 2020 and live off your savings. If your savings had stayed in the stock market, you would be forced into selling your investments at half their original value when the pandemic caused the market to drop in March/April. 

The solution? Move your money to less risky financial tools. If that’s not the stock market — what options exist to help your short-term investing strategies? 

What are the low-risk investment tools?

Recently, this exact question kept coming up as I was analyzing my current financial goals. I had maxed out my TFSA for the year and was sitting on nearly $20,000 of uncategorized spending money. The amount is well over my necessary emergency fund, but I made the personal decision not to invest any more in the stock market for several reasons. 

First, I am already heavily invested in stocks and it’s important to diversify your investments. Second, although you should never attempt to time the market, I wanted to wait to see how the pandemic continued to play out. I knew that I had other options to grow my money at low-risk.

GICs, money market funds, and high-interest savings accounts are some of the low-risk investment tools to explore. I realize that it’s easy to brush off 1-2% of interest, but it’s also important to remember the principle of compounding or the value that time and interest can have at growing your money. 

If I earned 2% annually on my $20,000 for five years, that’s an additional $2,081.62 in my pocket for whatever short-term goal I’m saving for. If not short-term, I’d have the option to move the money into a higher-earning investment when I choose.

Although these tools aren’t as glamorous, they can still play a vital part in your financial future and help you reach your goals. Having spent a significant portion of my career working with stocks, I felt much less confident about these tools and wanted to learn more before I moved my money. 

What is a Guaranteed Investment Certificate (GIC)?

These are a Canadian investment tool that provides a guaranteed rate when held over a fixed period. These certificates are issued by financial institutions and are low-risk since you are guaranteed to receive your money back and then some; however, you may be penalized if you take your money out too soon. The fixed period for GICs can differ from 6 months to 5 years; however, the longer your money is held, the higher the return. Returns can vary between 0.5% on the low-end and 2.0% on the high-end. This tool from money sense allows you to input your specific preferences such as time and investment amount and lists the rates available by various providers. 

When should you invest in GICs?

Investing in GICs, like all tools discussed in this article, are best on a short-term basis. They provide some, although not much, interest on any sum of money that you need to park. Comparatively to other low-risk tools, the fixed period of GICs may be used to your benefit or burden. If you don’t want to be tempted to spend your money, GICs may be a great option for you; however, if you aren’t sure when you’ll need the money, you risk cutting into your returns due to penalties. If you are looking for something easy to set up and low maintenance, GICs are a great option. They can be purchased and held within an existing account, so you don’t have to deal with opening and monitoring accounts at various institutions. Once they are purchased, you are guaranteed the rate initially advertised, meaning that you don’t have to be constantly monitoring it for changes. 

What are Money Market Funds?

Money Market Funds are a mutual fund that only invests in short-term, low-risk securities similar to cash. They work like regular mutual funds and can be purchased in the same way; however, money market funds aim to keep their price at $1 per share. The risk is low, meaning that you rarely lose money; however, some years, you won’t make anything since they move with the markets. You can expect to earn between 0.0%-0.8% every year. After accounting for the management fee or MER, it’s unlikely you will keep up with inflation. If you are interested in money market funds, the big banks have similar offerings. You can reach out to them or search online for a ‘Fund Facts’ document that provides the details.

When should you invest in Money Market Funds?

Like GICs, money market funds are easy to set up and are low maintenance. You can hold them in your existing brokerage account and require no action from you until you want to sell. They offer high liquidity (easy access to your money) and are low risk; however, the other tools mentioned here have greater benefits for the purpose they serve. With the high-end of returns being very little and not guaranteed and a constant management fee, I don’t feel that these are the best places to park your money. 

What are Treasury Bills (T-bills)?

By purchasing a T-bill, you are loaning money to the provincial and federal governments. T-bills are purchased from a financial institution and are issued in specific quantities such as $1000, $25,000, or even $1 million. How they work is that T-bills are issued with a specific “yield” or rate of return calculated from the difference between the price you bought and the price redeemed by the government. T-bills mature between one month and a year; however, you can sell them before maturity for a capital gain or loss depending on the price. For example, say you bought a T-bill for $975 and redeemed it for $1000, the yield you received was $25 or 2.56%. T-bill funds also exist that bundle a variety of them with various maturity dates. Current yields have significantly dropped to around 0.2% compared to 1.7% earlier in the year. 

When should you invest in T-Bills?

T-bills are very similar to GICs, with a few exceptions. Since the government backs T-bills, they are the lowest risk. These differ from GICs that are issued by financial institutions, where although the likelihood is very low, there is the potential to default. The minimum investment in GICs is $500, and the holding period ranges between six months and five years. T-Bills require a minimum investment of $1000 and are held for under a year. They also differ in the way you receive money. GICs will distribute interest on a scheduled basis, compared to a one-time payment at maturity or when you sell a T-bill. T-bills would be a valuable investment for earning interest within a few months while providing complete security. 

What is a High-Interest Savings Account?

High-interest savings accounts are accounts offered by financial institutions to entice you to park your money with them. It benefits them because they can use your money in their normal course of operations. They loan out your money at a greater rate than the rate paid to you and profit the difference. High-interest savings accounts are just like any savings account, but the rates are much better. You can find rates ranging between 1.0-2.5% at various Canadian Institutions. They are a great way to park your money for an extended period. The banks offering the best rates and fees are always changing, so if you are interested it’s important to do your research. As of right now, EQ bank is offering accounts for 1.7% annually with no fees and free transactions. 

When should you invest in a High-Interest Savings Account?

These accounts have a lot of great features, and the interest rates seem hard to beat when comparing them to other low-risk tools currently on the market. Due to the pandemic, interest rates on GICs and T-bills have been hit hard, and it’s tough to find anything over 1%. Currently, these accounts are offering higher rates; however, each one is different and should be heavily researched. The fine print may include certain caveats, such as only offering the advertised rate for a few months. These banks also have a right to change the terms of the account in time, so nothing is guaranteed. Of the tools mentioned here, these require the most time and maintenance as you have to open a new account and continuously monitor it for changes. 

My opinion during my research into these short-term investment strategies definitely changed. . I quickly realized that perfection is unattainable. and you must constantly be expanding your knowledge of personal finance. So, what have I decided to do? 

I’ve decided to open my first high-interest savings account outside of my current financial institution. When keeping your money with an institution, it’s important to have a list of the benefits they provide you. Like any relationship, you shouldn’t stay for fear of change. It was eye-opening to learn that a high-interest savings account can function as my checking account while providing me interest. I will likely be closing my checking account and adding to my savings account to earn even more. Although it’s a small amount, over time, it could make a significant difference for me. You don’t have to make big money moves to successfully build your financial future.