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Have you ever considered a Certificate1 as a home for your savings? Have you ever wondered, why open a certificate of deposit? (That’s another term that banks often use for this type of savings product, also commonly called CDs. They’re called Certificates at credit unions.) A certificate allows you to invest an amount of money at a specified dividend rate for a predetermined length of time. The dividend rate will be deposited into the certificate account either monthly or quarterly. This dividend adds up over time, allowing your funds to grow for retirement savings or other investments, while you continue your unique lifestyle. This compounded dividend is referred to as Annual Percentage Yield.
What Is a Certificate?
A certificate is a specific kind of savings account that makes your money work for you. You make an initial deposit into the account for a fixed amount of time, then earn a predetermined dividend rate on those funds when the certificate matures at the end of that time period. Typically, there’ll be an initial minimum deposit to open a certificate. The terms can range from a few months to five years or more. Remember, the longer the term, the bigger your wallet. It’s considered to be a safe investment, relative to other savings opportunities and often a favorite of conservative investors.
When you have some cash saved up, you want to help it grow and keep it safe. A certificate could be the option that gives you the best of both worlds. To determine whether and when a certificate is the right savings option for you, consider three advantages of certificates along with your personal goals: dividend rate, access, and timing.
Great Dividend Rates
Most certificates offer dividend rates that are higher than other savings accounts. This makes certificate dividend rates very attractive, sometimes with a rate of 5.00% or more. But even when interest rates are low, certificates usually offer dividend rates at least a full percentage point greater than that of a regular savings account. For example, if you put $5,000 in a regular savings account with a 0.50% APY for five years, your balance at the end of those five years would be about $5,126.26. But, if you put that same money in a certificate with an APY of 3.25%, your ending balance would be about $5,867.06. Now imagine if the APY were high. At a 5.00% rate you could enjoy an ending balance of $6,381.41. Best of all, you did not have to do anything special — just purchase the certificate and bide your time. It’s almost magical.
Limited Access but Returns Are Sure
You are making a trade-off when you choose a certificate over a regular savings account, and that’s giving up access to your money for the duration of the certificate’s term. The reason financial institutions offer higher dividend rates on certificates is because you are leaving your money in the certificate for the agreed upon period of time (the full term of the certificate).2 If you have an emergency and need to make an early withdrawal, there is typically a significant withdrawal penalty you will be required to pay. Not having access to your money may sound scary but think of it as your friend going on vacation — when they get back, they will have so many wonderful things to share with you.
Safe, Sound, and Predictable Timing
There are many benefits of Certificates, a key one being that the money you deposit in a certificate is insured by the NCUA for up to $250,000 per depositor. Additionally, with fixed-dividend-rate certificates you have the advantage of calculating exactly what you are going to earn before sending your money away. This ensures predictability in the unpredictable world of savings, especially when you are planning for the near future — like college tuition, a wedding, a down payment on a car, or a vacation. Now, you can feel confident in your savings plan and reach those saving goals with ease.
Choose the Right Certificate for You
Certificates are available at most financial institutions — however the minimum deposit requirements, rate of return, time until maturity, and other considerations vary. Be sure to do your research and consider these questions to determine how to choose the right term for you:
- What are your savings goals? How much money are you trying to save, and when do you need it? Timing is key. Choose a certificate that will mature before you expect you will need the money.
- What is the best dividend rate that works for your goals? Find certificates with the highest dividend rates with terms that align with your savings goals and with minimum deposits that you can afford. Will those dividend rates still be attractive in a few years? If so, lock in that dividend rate by choosing a long-term option. If you think that dividend rates may soon be higher, choose a short-term option.
- Can you cover your expenses before the certificate matures? Remember that certificates do not make a good emergency fund, because of the penalties for early withdrawal. Consider putting aside three to six months of expenses in a savings account that you have immediate access to before making longer-term investments.
With great dividend rates, certificates can be an excellent addition to your toolbox — making your money work for you. Interested in learning more about Certificates? Visit our Certificates page.
“At UFCU, we're all about helping our Members grow their savings with confidence. Certificates are a smart, low-risk way to watch your money grow while keeping it safe.”
Emmy Alcocer-Hill, Sr. Product Growth Mgr Everyday Banking Products
1 Must meet eligibility requirements. Certain restrictions apply. A penalty will or may be imposed for early withdrawal.
2 UFCU Certificate dividends are paid quarterly. Dividends are calculated by the daily balance method. Dividends are based on UFCU's earnings at the end of a dividend period, and cannot be guaranteed.