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Email this4:53 am
December 17, 2016
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Kidd said
AND right now you can get a coffee at McDonalds for $1.05.
Which is why there are NO lineups at Tim Horton's Drive-Thru . NICE
5:27 am
September 7, 2018
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Loonie said
But, since we don't know which way the wind will blow, it's worth remembering that$100K @ 3% renewed annually gets you $15,927 interest in 5 years
and
$100K @ 3.75% compounded annually gets you $20,210 interest in 5 years.
Not quite so rosy for many in this forum when:
1. you must pay income tax each year on the interest/compounded interest, even though you don't receive the interest/compounded interest until maturity in 5 years.
2. depending on your tax rate, you may receive half that amount after income taxes.
Something to think about in managing investments.
6:27 am
October 21, 2013
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canadian.100 said
Not quite so rosy for many in this forum when:
1. you must pay income tax each year on the interest/compounded interest, even though you don't receive the interest/compounded interest until maturity in 5 years.
2. depending on your tax rate, you may receive half that amount after income taxes.
Something to think about in managing investments.
I'm not sure what that has to do with my post, but.. OK.
You are always going to have to pay tax annually on GIC interest, no matter what the specific investment.
The only one I'm not sure about is those "market-linked GICs". I presume you pay tax only in the year of redemption for them as there is no way to know how much you will receive until then.(Another reason not to buy them in that case!)
8:36 am
September 11, 2013
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Exactly, canadian.100, it's inaccurate to say something "gets you" $4283 more when in fact the number after taxes is less. (Also you can get more than 3% on short-term money these days.)
Finally, there are reasons the 5-year GIC rate is generally higher than the one year rate. Aside from having no access to your money for 5 years, in a time when voters turf out any government that doesn't print money (or its equivalent) in response to a financial "crisis" the risk for the quick return of higher inflation is heightened, so being caught with your money tied up in that situation requires additional compensation in the form of a higher rate to entice folks to lock in longer term.
3:09 pm
October 21, 2013
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I was under the impression it had already been demonstrated that cashing in before maturity would be a bad idea in terms of taxation.
So, moving on from there, a five year GIC will gross and net you more than a series of one years, rates being constant. It's really a very simple point, one that I would have thought we all understood. I would not have bothered to make it if canadian100 had not cited my earlier comment as if it were related to his.
Enough already!
5:56 pm
September 11, 2013
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Loonie, I agree, what you say is indeed stating the obvious, but what we were pointing out was something else, i.e. that your numbers were pre-tax and that after-tax numbers would show that, yes, of course there is a difference between 3% and 3.75% but it is not as great as the $4283 your example indicates. The actual number is less, maybe much less, than $4283 (unless you pay no income taxes).
Looking at after-tax return when considering investments or savings vehicles is a basic principle used by sophisticated investors and savers when deciding which investment vehicles are appropriate for them. I like to remind readers (this site is viewed by folks who may be relatively new to saving/investing) that taxes always need to be taken into account when you are doing your calculations. A 3% GIC is actually not a 3% GIC, after tax it might be a 2%, a 1.75%, etc GIC.
As well, it's also stating the obvious that over a 5-year period rates will never be constant, they will always be fluctuating over that time, so in that sense your example of five straight years where 3% is the one-year GIC rate will never happen in real life.
12:15 am
October 21, 2013
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You've missed my point, Bill, simple though it is.
The point was simply that, regardless of what tax you may pay, you will end up with more with a longer term if it has a higher rate, rates being constant (or even somewhere near constant). Rates CAN, by chance, remain constant at times of renewal, just as they can turn out to be any other number, by chance. There is nothing to prevent this.
Even though there are reasons to focus on the shorter term right now, there are also reasons to consider the longer one. We should not lose sight of the comparative returns. Taxes are irrelevant for this purpose., and a "sophisticated" understanding of investing only confuses the matter. The higher the return, the more you get to keep; that's what matters, regardless of taxes, which will vary. We are not comparing to other kinds of investments, in which case taxes would matter more in most cases. We are simply comparing two rates of the same type of investment - apples to apples.
It is you who keeps focusing on $4283, not me. In fact, I did not even bother to do the subtraction, because the exact amount of difference is not that important to the principle. The more you earn, the more you keep. The simplicity of the point may belie its importance and make it difficult to get across.
Personally, I have invested in both recently, so I have no particular bias.
To the extent you insist taxes must be relevant, remember that interest on TFSA GICs is never taxed. TFSAs are very popular, and average deposits are not high, so it's likely many are in GICs and will continue to be.
I think you are trying to make a mountain out of a molehill.
I will have no further comment on this. It would be a waste of time. Anyone who wants to understand what I'm saying will, hopefully, have done so by now.
5:33 am
February 27, 2018
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Loonie, I find that i am also, often misunderstood. I am just a soul whose intentions are good.
Remember me trying to explain... 3 people go to a motel and pay $5 each, and then they get $5 back? I had to remove the entire post because it caused so much confusion. Oh look... a squirrel.
5:47 am
September 11, 2013
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Loonie, you expressed confusion ("I'm not sure what that has to do with my post") at canadian.100's reasonable comment that when anyone considers a specific example with specific numbers, as you chose to provide, that one needs to also adjust those numbers for their own tax effect, if applicable. I wrote because I agreed with him that his observation in fact had a lot to do with your post.
Your point was that 3.75% earns you more than 3%? Uh, sure, we'll leave it at that.
6:01 am
May 24, 2016
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Kidd, some posts I choose to pass over, but I always read yours! Love that squirrel pic.
9:05 am
September 7, 2018
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Bill said
Loonie, you expressed confusion ("I'm not sure what that has to do with my post") at canadian.100's reasonable comment that when anyone considers a specific example with specific numbers, as you chose to provide, that one needs to also adjust those numbers for their own tax effect, if applicable. I wrote because I agreed with him that his observation in fact had a lot to do with your post.Your point was that 3.75% earns you more than 3%? Uh, sure, we'll leave it at that.
Loonie - I re-read my posting again - you seem to have gone a bit ballistic over some VERY innocuous posts by myself and by Bill. Hope you have a good day today.
6:24 am
September 5, 2013
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It’s always one of hot topics for saving: short term vs long term. We don’t have any magic, and that laddering them depending on your future needs.
I read the following this morning :
...
MarketWatch: What’s the best financial advice you’ve ever been given?
Ohanian:The miracle of compounding is real. It’s important to have a long-term focus when it comes to investing and saving. Generally speaking, the better you are at delaying gratification and the overall happiness of spending, the better off you’ll be with your long-term financial well-being.
...
8:06 am
December 17, 2016
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Brimleychen said
Ohanian said: ... Generally speaking, the better you are at delaying gratification and the overall happiness of spending, the better off you’ll be with your long-term financial well-being.
I think it provides a better life balance to say
the sooner you understand the difference between wants and needs
the better off you’ll be with your long-term financial well-being.
Somewhere along the long curve you've got to be able to enjoy the fruits of your labour, you just have to pick your spots. I particularly enjoy going on holidays where absolutely everything is BOTH a want and a need.
6:38 am
September 5, 2013
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TopItUp, well said!
For Canada fixed income market, something is happening...
Earlier this week the Canada 2 and 5 year bond yields inverted, for the first time since 2007. A flat or inverted yield curve is when short term rates exceed long-term rates. This is often taken as a signal that investors are more optimistic about short-term prospects versus the long term, suggesting a lack of confidence in continued economic growth. This can also impact bank profitability, as banks pay short-term rates on deposits and take in long-term rates on loans. A flat or inverted yield curve, therefore, could lead to negative net interest margins.
In simpler terms, this can cause bank lending to further tighter, leaving borrowers high and dry when market liquidity is most needed.
...
Will GIC / savings follow the market?
11:24 am
October 21, 2013
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I don't watch the bond market, but I have noticed that GIC rates have been hovering near flat for quite a while now. Very little difference between 2 and 3 year rates. Four years at Ganaraska gives more than five years anywhere.
9:32 am
October 29, 2017
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Brimleychen, doesn't it also mean that lenders and bond issuers are not confident in long term market growth? Because, they aren't offering higher rates on long term investments. It would be very easy to say lenders and bond issuers are causing the inversion because they chose to offer better rates on short terms.
Please write your comments in the forum.