Inflation can take a serious bite out of your savings. According to Statistics Canada, there was 5.2% year-over-year inflation in February 2023. This is actually a decrease from the preceding months, but sky-high compared to the past four decades. Before this past year, many Canadian adults had never experienced high, sustained inflation.
In an unpredictable economy, it is normal to be scared to invest.
Unfortunately, failing to act means choosing to lose money. High inflation erodes your savings and means losing buying power.
With some financial savvy though, there are concrete steps you can take to stay on top of inflation. Money left sitting in a savings account loses value daily, but you can beat inflation by investing in GICs, maximizing your tax-free savings accounts, and reconsidering stock market investing.
2023 brings renewed interest in guaranteed investment certificates. In a typical financial climate, these instruments are often overlooked, even boring. But today, they demand attention because some 1-year GICs offer more than a 5% return. As the name implies, they are a rare guaranteed investment. You know precisely how much you will make when you invest in a GIC.
With the current interest rates, GICs are hard to beat for a safe, short-term investment.
Imagine that you have $50,000 to invest. Putting it all towards a 1-year GIC with a 4.25% interest yields $52,125 just 12 months later. That is a guaranteed $2,125 return.
| 1-year GIC | Rate | Value at Maturity | Interest Earned |
| $50,000 | 4.25% | $52,125 | $2,125 |
Of course, you do not need anything near that sum to get started. You can invest in a GIC with as little as $500 or $1,000 with most lenders.
The biggest disadvantage of a GIC is that the sum is not accessible before maturity (at least not without a penalty). The solution is GIC laddering, which offers a powerful way to gain flexibility and take advantage of the current unusually-high short-term interest rates.
Here’s how laddering works. Instead of putting all your money into a single GIC, you invest it into multiple GICs with different maturity dates.
It might look like this if you buy five GICs, each worth $10,000.
| Term Length | Rate | Value at Maturity | Interest Earned |
| 1-year | 4.15% | $10,415 | $415 |
| 2-year | 4.00% | $10,816 | $816 |
| 3-year | 3.75% | $11,168 | $1,168 |
| 4-year | 3.75% | $11,587 | $1,587 |
| 5-year | 3.75% | $12,021 | $2,021 |
These are the posted rates from one of Canada’s Big Five banks. Some online lenders offer even more.
As each GIC matures, you may either access or reinvest your money. In a normal investing environment, longer-term GICs offer a higher interest rate than shorter-term ones. To continue your ladder, buy a new 5-year GIC as each old one matures. Staggering the maturity dates maximizes your investment while giving you regular access to the money if needed.
In TFSAs and RRSPs, Canadians have flexible, compelling investment accounts. These are great options to help investors save on their tax bills. These accounts can hold many investment types including GICs and stock market investments.
Tax-free Savings Accounts (TFSA) earn money tax-free. Let’s see an example.
The TFSA contribution limit for 2023 is $6,500. If you max that amount out on a 5% 1-year GIC, you will earn $325. Now let us assume you have a 25% tax rate and hold your GIC in a non-registered account. You would owe $81.25 in taxes on your investment income, dropping your earnings to just $243.75.
| Account | 1-year GIC | Interest Earned | Tax rate | Remaining after taxes |
| In a TFSA | $6,500 | $325 | 0% | $325 |
| In a non-registered account | $6,500 | $325 | 25% | $243.75 |
Another registered account option is the Registered Retirement Saving Plan. With RRSPs, it is contributions, rather than earnings, that are tax-deductible.
As a very rough example, suppose you invest that same $6,500 towards an RRSP instead. At a 25% tax rate, you could save $1,625 off your income tax, while setting aside money for the future.
The RRSP contribution limit for 2023 is the lesser of $30,780 and 18% of your 2022 earned income.
The tax savings with both accounts are significant. Many investors should max out their TFSA or RRSP before investing somewhere else. Just remember that everyone’s tax situation is different. Always check with a professional to see what makes the best financial sense for you.
Did you know that the S&P/TSX Composite Index grew an average of 9.3% between 1960 and 2020? Inflation during that same period was just 3.8%.
While it is true that stocks have taken a beating over the past year, stock market investing remains a time-tested long-term investment strategy.
2023 could well be a bumpy ride for stock market investors between inflation pressures and a still-strained supply chain. In the short-term energy, finance, communication, utilities and commodities stocks are worth a look. These industries have historically performed well when inflation is high.
Short-term instability aside, the stock market outlook looks brighter for 2024 and beyond. The Bank of Canada and the US Federal Reserve Board are working towards a return to a 2% inflation rate by the end of next year. Many financial experts project that stocks will recover once inflation dips.
The stock market will remain a sound option for investors seeking long-term growth. While past performance is no guarantee of future returns, a wide portfolio of index funds or ETFs spreads out risk.
High inflation is a challenge for any investor—especially Millennial and Generation X Canadians experiencing it for the first time. It is, however, possible to protect your savings by taking proactive steps to invest smartly.
Combat inflation by investing in GICs in the short term, maximizing tax-sheltered accounts, and exploring stock market investments for long-term growth.
Consider these strategies to maintain buying power and even make investment income in the face of high inflation. A financial advisor can help walk you through the steps if you are unsure how to get started.
These insights have been shared by HelloSafe.ca, an online platform that allows you to evaluate your insurance, credit offers and investment options.
