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The Art of Interest.
November 13, 2018
8:10 am
Kidd
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February 27, 2018
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Tangerine has made some of us an, “interesting” proposal. 3% on a one year GIC, or 3% paid on your savings. The sales rep will make the GIC sound more “interesting,” it’s the first offer they’ll make but is it?

Let’s do the math.
Deposit $100,000
Interest rate 3%

The one year GIC will pay $3,000. That’s simple math.

3% on your savings is a little more complicated to calculate because it’s compounded. The first month, 3% is paid on $100,000 BUT the second month 3% is paid on $100,254.80 because it includes the interest you earned in the first month. By years end, the 3% paid on your savings makes you an extra $41.60 ($3,041.60) BUT after the taxman takes his bite… you’ll have made a whole $27 more.

Bill, I’m going to beat you to the punch. Tangerine are only promising to pay 3% on your savings for 6 months… After that you must negotiated a new term. I always look forward to negotiations, it must be the blue collar in me.sf-cool

November 13, 2018
8:29 am
canadian.100
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September 7, 2018
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Kidd said
Tangerine has made some of us an, “interesting” proposal. 3% on a one year GIC, or 3% paid on your savings. The sales rep will make the GIC sound more “interesting,” it’s the first offer they’ll make but is it?

Let’s do the math.
Deposit $100,000
Interest rate 3%

The one year GIC will pay $3,000. That’s simple math.

3% on your savings is a little more complicated to calculate because it’s compounded. The first month, 3% is paid on $100,000 BUT the second month 3% is paid on $100,254.80 because it includes the interest you earned in the first month. By years end, the 3% paid on your savings makes you an extra $41.60 ($3,041.60) BUT after the taxman takes his bite… you’ll have made a whole $27 more.

Bill, I’m going to beat you to the punch. Tangerine are only promising to pay 3% on your savings for 6 months… After that you must negotiated a new term. I always look forward to negotiations, it must be the blue collar in me.sf-cool  

The income tax rate on GIC interest is always a downside to investing in interest bearing investments. Investors looking at tax implications do tend to invest some of their savings in good (blue chip) companies paying dividends e.g. Canadian banks - the return after tax can be significantly more than after interest. I have found blue chip stocks to be have been a good alternative for some savings. Everyone (personal circumstances etc.) has to decide how much they put in GICs (interest heavily taxed) and blue chip dividend stocks dividends (lightly taxed because of dividend tax credit).

November 13, 2018
5:06 pm
Loonie
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October 21, 2013
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The gross-up on dividends needs to be taken into account though. It's worse for retirees because it can get you into clawback territory.

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