Your time, well spent
What is a Certificate?
Simply, these products involve you committing a particular amount of money to a new account for a certain amount of time; often CDs run for as little as 12 months and as many as 72 or more months. For that whole time, you receive a much higher interest rate than a typical savings account, and the rate is often higher and higher depending on the amount of months you've selected for your CD. This means that the longer you are able to keep your money "locked up," the more returns you receive during that time. This does mean that there are penalties for removing money early; knowing that you won't withdraw the money is part of how banks and credit unions can get such a good rate of return on your money.
Lock in a Great Interest Rate for the Life of the CD
The biggest benefit of this product is that it locks in a great interest rate. The market is always changing, but the Certificate is a way to get a guaranteed rate of return even if the market goes up and down throughout the time your money is invested. When your Certificate comes due, you get all the money you invested, plus the compounded, higher-rate interest that you have been earning throughout the months of the CD. Many people take that moment as a great time to evaluate the rates for CDs and reinvest the money immediately to continue getting a great rate.
Insured Returns: No Risky Stocks Here
CDs are one of the products that are secured by the Federal Deposit Insurance Commission, up to $250,000. This means that you won't lose the money you've invested in this, creating a safe investment. Stocks and bonds can occasionally generate greater rates of return, but they also have the potential for large losses if the stocks or bonds dip in value. When making sure you balance risk and return in your overall assets, having some investments that are FDIC insured is a great way to make sure that even a major market event won't topple you.
The Option of Rolling "Certificate Ladders"
It can be tempting to invest all of one's money in a Certificate when a great interest rate promotion is going on. However, one of the ways that many people avoid the feeling of having "all their money locked up" while also taking advantage of the latest competitive Certificate rates is by creating a "Certificate Ladder." This is how it is done. Say you have $20,000 to invest, but you know that some of it might be needed within a year or so. Invest $5,000 in a 1 year CD, which will usually have the lowest rate, and invest $5,000 more in a 2 year, a 3 year, a 4 year, and a 5 year. This means you've essentially got $5000 coming out of a Certificate every year for 5 years.
When the money is freed with its new interest attached to it, you can make one of two choices: use it, if needed, or reinvest it in a 5 year CD. Because of your original "ladder," you'll still have $5,000 coming out every year, but from that point on, you can always cash in on higher-return 5 year rates. True, you'll never have all $20,000 (or whatever your personal total sum is) at once, but like with any CD, you can usually break a Certificate in a true emergency for a fee.
When Having Money "Locked Up" is a Good Thing
An obvious downside of the Certificate is that it isn't as liquid, or easily available, as savings accounts, checking accounts, or some other investment accounts. However, it does have some liquidity: it is more easily accessible than a retirement account, for instance, since it comes due faster for most people and is not subject to any extreme penalties for early removal. Having a small fee for early retrieval of this money can actually be a benefit for a variety of kinds of people:
- If you are working a stable job and know that you can reasonably live on your paycheck while continuing to save a little bit each month, a CD is an excellent way to "hide money from yourself." It makes it seem like the money is inaccessible for impulse shopping or momentary whims, but in a true emergency, it will be worth the fees to pay whatever unexpected bills come your way.
- If you receive unexpected money, like an inheritance or the remnants of a college fund, and you don't want to accidentally spend it all quickly. A shorter term Certificate can be perfect: give yourself at least a year to think carefully about how to spend that money, and you'll make a substantial return on it while you also have time to make a good decision.
- If you aren't yet ready to start investing in riskier investments yourself, or if you want to make sure some of your money is secured while you begin learning about stocks and bonds, a Certificate gives much needed stability for part or all of your nest egg. Not being able to access it if you have a bad day trading stocks or if your mutual funds take a brief dive will be a good thing: you want to have that money set aside!
While Certificates are a wonderful tool for low-risk savings and returns, there are many other ways to use your money and many other products that your local credit union can introduce you to. To learn more about what your local credit union can do for you, visit us today.