Understanding certificates and how they fit into a savings strategy

Saving money is an important part of creating financial security now and later. Once you get a handle on managing your expenses and budget (including saving every month), it’s time to decide where to keep your money. The go-to options for storing an emergency fund are in a basic savings account or money market account. Each choice earns only a small amount of interest, but you can access the money if you need it. Once that’s covered, it’s time to think about having your money make money. That’s where a high-earning certificate (certificate of deposit or CD) figures in. What are certificates? Read on to learn about certificates and how they work.

Certificates earn more

A certificate is issued by a bank or credit union. When you open a certificate account, you commit to depositing a chunk of money with that financial institution and leaving it there for a specified amount of time (the “term”). The bank or credit union commits to paying you a certain percentage in interest (the Annual Percentage Yield or APY) on your deposit. In exchange for locking in your money for the term, you earn a higher interest rate than with a basic savings account or money market account. And right now, certificate rates are the highest they’ve been in years.

Saving on your terms

Each bank or credit union decides the interest they will pay for certificate terms. The interest rate is fixed, meaning it cannot change throughout the length of the term. Terms typically range from three months to five years. You choose the term length that works best for you and how much you want to deposit.

You should be clear on how soon you may want to access the money. Once you open a certificate you cannot add money to it and if you withdraw your money before the end of the term, you’ll have to pay an “early withdrawal penalty.” Penalties, set by the individual bank or credit union, usually range from three to six months’ interest, depending on the certificate’s term. Read the disclosures carefully. One big bank’s early withdrawal penalty is 12 months’ interest!

Some certificates have special promotional terms to encourage saving, like our 7-Month No Penalty Certificate. The term isn’t too long, and this certificate carries no penalty for early withdrawal. Other promotional certificate terms may offer competitive rates with a higher minimum deposit, or an option to bump up the rate. Be aware that some promotional certificate rates may not be available to renew at the end of the term.

When your certificate’s term ends (“matures”), you can add or withdraw money, let it roll over into the same term (if renewable), change the term, or simply close the account.

Securing the term

While certificate rates are set by individual banks or credit unions, they are influenced by interest rates set by the Federal Reserve. When the Federal Reserve raises or lowers rates, interest rates on mortgages, credit cards and certificates typically follow suit. No matter how rates may fluctuate, once you open a certificate account your rate is locked in for the full term, guaranteed.

Your rate and your deposit are both guaranteed. Certificate deposits in a bank or credit union are federally insured up to at least $250,000 per customer. The Federal Deposit Insurance Corporation (FDIC) insures bank deposits, and the National Credit Union Administration (NCUA) insures credit union deposits. This insurance means in the unlikely event that the financial institution fails, your deposit up to $250,000 is protected, so you won’t lose your money.

YES to your success

It’s important to have a mix of savings accounts for a strong financial future. In addition to certificates, some banks and credit unions offer special high-yield savings accounts. These accounts earn higher interest than a basic savings account and are a great way to earn more while you’re saving for shorter-term goals, like a car. Keep in mind these accounts often come with stricter requirements such as a larger opening deposit amount or limits on the number of monthly withdrawals you can make. Unlike certificates, the interest rate on a special high-yield savings account can change at any time.

When designing your savings strategy, certificates are a smart choice to add to your plan. Certificates offer guaranteed returns, a variety of terms, and higher interest rates than money market and savings accounts.

Great job saving and keep going on your path to financial success!