Building a monthly GIC ladder with Ally

[plen]

The fixed income portion of my TFSA is cash I contribute monthly to Ally's simple 2% savings account. It serves as an emergency fund as well but I wanted to maximize my guaranteed returns so started thinking about a GIC ladder.

I, however, prefer to contribute monthly and figured at first, "Okay I'll keep contributing monthly into the savings account but only grow my ladder every year or at least until rates drop once more". But then I started thinking "You know what, it's a shame when I don't need this cash that I'm not earning better interest."

After thinking for a while, what I decided I really wanted to do was build a monthly GIC ladder.

Reasons:

It will support my monthly contributions which helps me to budget better
If I ever do need emergency funds I don't have to take out more than I need by cashing in early on a large yearly contributions, I just take the months worth that I need.
It keeps me active with boring ol savings, I like working at growing my retirement so it will be an enjoyable part of this hobby, something more to do each month.
If I have to miss a month I can always catchup the next year to keep the monthly cycle coming
If it becomes too cumbersome, no sweat, just go back to yearly
If I continue with it for my working lifetime it will act as another monthly income source come retirement to act as a bridge.


I'm not a shill for Ally and there are other institutions that offer better rates but Ally has a few perks that work for me that makes this easier. I'm not too sure how many other institutions offer GICs for as low as $1


I'm already setup with them
You can buy a GIC for as low as $1
Their GIC rates are pretty competitive
Has a one time "raise your rate" option on their 2 year GICs
Pays interest monthly, compounded daily
No fees for redemption, though only 1.5% interest compounded daily is given if you redeem early
Note: Purchasing TF GICs from a TFSA with Ally requires you chat online, phone or secure message a CSR to ask them to make sure it goes as a TFSA transfer and not a withdrawal/contribution, this is also required for transferring interest earned each month. These are both going to probably be the biggest headache of the process. But hopefully this can become automated in their system over the future.


So here's the plan. Please note, this doesn't need to be done as part of a Tax Free savings plan.

First off, unless you really think their savings rate is going to drop it makes no sense to buy the 1y GIC (1.75%) which earns less interest than the regular savings account (2%), but the 18 month does pay 2.25%

Here are the annual rates as of today, compounded daily

18mo: 2.25%
2y: 2.40%
3y: 2.60%
4y: 2.90%
5y: 3.30%


Starting cash in TFSA $3250

1st of every month: transfer $250 from bank to Ally TFSA.

Months 1-6 (For me February-July/11)
21st of every month: Buy $50+(interest earned/5) each 18mo, 2y, 3y, 4y, 5y GICs.
After July/11 contribution, I'll have GICs maturing in 12-24mo, 30-36mo, 42-48mo and 54-60mo

Months 7-12 (For me August/11-January/12)
21st of every month: Buy $50+(interest earned/5) each 2y, 3y, 4y GICs. Buy $100+(interest earned/5)*2 5y GICs.
After Jan/12 contribution, I'll have GICs maturing every month in 6-60mo

Months 13-18 (For me February/12-July/12)
Begin directing all external contributions+interest towards 5y GICs

Month 18+ (For me August/12+)
First maturity, don't renew, roll principal and interest plus external contributions into 5y GICs

Month 60+ (For me February/16)
All GICs maturing every month are now 5y GICs

This of course could all change if interest rates start dropping again for whatever reason and bonds become the better choice, at that point it would make sense to just begin letting each GIC mature and keeping the cash as emergency only and redirecting new contributions to bonds.

As you may have noticed I'll still always have about $3000 in cash as that value isn't really changing. I can dip into that in the case of emergencies instead of redeeming a GIC early and being penalized. If I need more than that, that's when I will start having to redeeming some of my GICs early. I could also forego a bit of the value of my 5y GICs that I purchase after month 12 to build the cash portion up.

Another thing I'm prepared to consider is the case where for example I might have a 5Y GIC at 3.30% that still has 3Y to maturity but the 3Y GICs are now offering say 4.25%. At this point it will be a computation to determine whether redeeming early and replacing would net me more interest earned.

In the example above:
$50 @ 1.50% for 2 years = $1.52
$51.52 @ 4.25% for 3 years = $7.01

$50 @ 3.3% for 5 years = $8.97

So in this case, I'm better off to stick to the 5Y GIC $8.97 vs $8.53. Naturally these differences aren't very significant when they're only worth $50 but when they start to become worth more they could be.

I intend to keep this diary here so at the end of certain time periods I can assess the pros and cons of this plan.

Please feel free to comment!

[OhGreatGuru]

- If your idea catches on, you can bet the $1 minimum for GIC purchases won't last long.
- Not too many people are going to have the time or patience to manage a portfolio of 60 GICs, particularly if they have to deal by phone every month for renewals & new purchases.
- It sounds like a good idea in concept to have a GIC mature monthly, so you are never more than 30 days away from some extra ready cash. But you must be on a pretty tight budget if a $50 GIC is going to be of any use to you in an emergency. And I note you are already carrying a $3k emergency fund. So what's the point?

[the-royal-mail]

This seems incredibly complicated. If something requires this much text to explain, it's far beyond what most people are willing to do. IMO though, so if it works for you, good luck.

[plen]

- If your idea catches on, you can bet the $1 minimum for GIC purchases won't last long.

I'm not sure I agree here, besides if they were to raise it, I can't see it suddenly being $500 minimum



- Not too many people are going to have the time or patience to manage a portfolio of 60 GICs, particularly if they have to deal by phone every month for renewals & new purchases.



Absolutely 100% agree with this, but I'm prepared to manage this once a month. And besides that, I don't even need to make the phone call, I can chat online or just secure message them the procedure.



- It sounds like a good idea in concept to have a GIC mature monthly, so you are never more than 30 days away from some extra ready cash. But you must be on a pretty tight budget if a $50 GIC is going to be of any use to you in an emergency. And I note you are already carrying a $3k emergency fund. So what's the point?

After 6 months, the oldest maturing GICs are being bought for $100+interest earned, after 12 months they are at $250+interest earned, after 18 months they are at $300+interest earned. After the 5 years they start to double, after 10 they triple etc.

This isn't all about my emergency fund it's about a guaranteed asset allocation for the future with no loss of principal. Once the emergency fund is covered it will become a retirement income consideration.

[plen]

This seems incredibly complicated. If something requires this much text to explain, it's far beyond what most people are willing to do. IMO though, so if it works for you, good luck.

I don't think it's that complicated if you were to compare it to say explaining to someone how to open a discount brokerage account, buy an asset allocation of ETFs set to their desires then rebalance yearly. Also explaining which discount brokerage to go to and the reasons why they should do this at the same time.

Besides, I don't think the people in this forum necessarily fall under the "most people" category when it comes to financial planning.

Either way, I do understand that it could become arduous and cumbersome, and I guess why I figured I'd make a diary out of it.

Cheers!

[balk]

Why don't you just save up and add the new money to the ladder once a year. It seems like a lot of time and effort for the amount of money you are dealing with. The amount of lost money due to missed interest payments would be quite small. Also, why are you buying 18 month GICs instead of 1 year GICs that would complete your ladder.

I am currently have a similar situation with ING as I have 25k, which is part of my downpayment for a house sitting in an RRSP savings account and I am getting around $30 a month in interest. Now since I can't take out more than 25k I am putting the extra money into GICs but I am waiting till I have larger sums to make it easier to manage.

Just a thought.

[marina628]

I have been buying a $1000 GIC every month for 21 months to be exact :)I started my spreadsheet for how they will look in future ,my plan is to buy one a month until 2015.

[plen]

I presume you mean 5Y GICs marina? I considered that option as well (just buying $250 5Y GICs monthly), but this method fills in the gap sooner in case I need that money for an emergency, thus I won't necessarily be penalized as much if I do need more than the $3k cash.

[marina628]

I am with TD so I have been mixing it up a bit as rates suck ,sometimes 15 month GIC with the special rate ,currently 1.75% ,sometimes I buy the market linked GIC in 3 or 5 year and other times I buy the 5 year Stepper.
I do not need the money so no risk of me cashing in early.