Are you holding on to a sum of money in your savings that you won’t need for at least the next six months? Maybe you’re planning on buying your next home, or purchasing your dream car, but you aren’t quite ready to make the purchase?
If so, you may want to consider a certificate of deposit (also referred to as a “certificate”). A certificate is a secure, low-risk way to invest that lets you simultaneously save your dollars and grow your money. Certificates are structured in a way that allows the individual to get a higher return by forfeiting liquidity for a pre-determined period of time.
How Does a Certificate of Deposit Work?
Think of a certificate of deposit as a savings account, but on a timer. You buy a certificate, you deposit a sum of money into an account for a predetermined slot of time, your credit union (or bank) gives you a certificate with the stated interest rate / expiration date of the account, and then that sum earns interest while you wait.
The time you decide to put the money away for can be any period upwards from six months- it’s your choice (although accounts typically mature between six months and five years). Under typical conditions, the longer the length of the certificate, the higher your return will be. This is because your money won’t be accessible (without penalty) for a longer period of time so you’re compensated with a higher interest rate.
It’s worth mentioning that if you do end up needing to take out money earlier than the maturity date, you’ll generally have to pay an early withdrawal penalty - so you’ll want to be sure that the money you’re putting away will not be needed at any point (in part or in full) during its term.
What’s So Great about Certificates of Deposit?
Certificates of deposit are among the safest investments you can make. The interest rate is pre-determined, and you’re guaranteed to get back what you put into your investment plus interest (once the term is over).
You don’t have to worry about any fluctuating variables as you would for other types of investments, and they generally offer better rates than a traditional savings account. So if you were to put $1,000 into your savings account and leave it untouched for two years, you would end up making about $2 in interest (with the .10% APY offered in a Prime Savings account). If you were to put that same $1,000 away into a certificate account and leave it untouched for two years, you would leave with about $21 in interest (with the 1.05% APY of a Share Certificate). Most of the time, you will make more money off of saving with a certificate of deposit as they usually have better interest rates than traditional savings accounts.
Some credit unions, like HRCCU, offer certificate specials with higher APY rates during different times of the year. Usually offered for a limited time, it’s smart to keep an eye out for these special rates and make strategic deposits when the opportunity arises (HRCCU is offering special rates right now!).
Certificate accounts are also covered by the Federal Deposit Insurance Corporation (the FDIC) which insures your savings for up to $250,000. So your money is safe to grow.
So How Do I Best Manage My Certificate Account?
A good way to give yourself the highest earnings possible (while also giving yourself a little bit of a safety net in case of an emergency), is to stagger your investments (a strategy called “laddering”). Laddering your investments gives you periodic access to your cash while still allowing you to collect interest rates. How do you do this? By breaking up your investments into different certificates with varying terms.
For example: If you wanted to put $10,000 into a certificate- instead of putting all $10k into a three year account, you could put $1,000 into a six month certificate, $3,000 into a one year certificate, $3,000 into a two year certificate and $3,000 into a three year certificate.
As your certificates mature, you could continue to reinvest them into further out certificates to keep your “ladder” secure. This would give you penalty-free periodic access to your cash as each certificate matures, and higher interest rates the farther out you build your ladder.