Should You Put Your Money into a Certificate (aka CD)?

Oct 21, 2022
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Learn more about Certificates of Deposit (CDs) from The Police Credit Union. Get started today for as little as $500.

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If you’re a member of a credit union, you may have heard the term “Share Certificate” or simply “Certificate” to refer to a type of deposit account that enables you to keep your cash safe, while providing you with earnings on this money. While the language differs slightly, a Certificate functions very similarly to what’s known as a CD (Certificate of Deposit) at a bank. Both are low-risk savings tools in which you commit to keeping money on deposit for a specified length of time. You’ll earn a fixed rate of return in exchange for leaving these funds untouched until the term is said to mature. Once the term ends, you can withdraw the money, or it can be rolled over for another term. Although there is a wide variation among offerings, standard terms range from three months to five years. In many cases, if you withdraw money before the maturity date, you’ll incur early withdraw penalties.

A Certificate or CD can offer important advantages as a savings vehicle and a secure component of a balanced financial portfolio. Whether you’ve received a windfall or need a place to keep your money for a short or longer-range goal, they typically provide you with a higher rate of return than you would receive from a savings account or money market account. They’re also an effective way to create a barrier between funds you use for everyday expenses, and money that will be used for a specific purpose or as income at a later date. To help you determine when investing in one might make sense for your financial situation, we’ve explored the pertinent facts about their benefits as well as their limitations.

Good reasons to invest in a certificate:

They are a safe place to keep your money

A major upside to Certificates is that they offer a guaranteed rate of return with almost zero risk. Essentially, the only way you would lose money on one would be by withdrawing funds before the end of the fixed term. Both Certificates at credit unions and CDs opened at federally insured banks are insured against losses for up to $250,000 (or up to $500,000 for a joint account). However, if you withdraw funds before maturity, you’ll likely pay a penalty, which will reduce your earnings, and could possibly even diminish your principal.

You can typically earn more on your money than you would from a basic savings account

Financial institutions will typically pay a higher annual percentage yield (APY) on a Certificate than a savings account. Because you are locking up your money in an account for a specified amount of time, you’re rewarded with higher returns on your money than you would receive to keep these funds in a more liquid account. Moreover, providers will pay higher rates if you commit to longer terms. For instance, you can typically get a higher APY on a one-year Certificate than one with a maturity of three months.

They offer predictability and stability

Time deposits like Certificates generally have rates that are set when you open the account, and they remain the same throughout the term. With a fixed rate and term, you’ll know exactly how much you’ll earn on your money and when you’ll have access to these funds. This predictability can make it easier to plan for the near-future. In contrast, the yield on a traditional savings account can rise and fall as time progresses.

You can ladder your Certificates to take advantage of rising rates and to supplement your income

In general, the yield on savings, money market and certificate accounts are adjusted in response to changing market conditions as well as internal dynamics at the financial institution that provides them. But when you open a Certificate, your rate is locked in. This fixed rate works to your advantage if you have money in a Certificate when rates are dropping, because your earnings will still reflect the higher opening rate.

But if you’re concerned that rates will rise and you’ll be stuck with a lower APY, a good strategy can be to purchase multiple Certificates at one time with varying maturity dates. By spreading a lump sum of money across several Certificate accounts with different term lengths, this helps ensure that you won’t lock up too much money for an extended period of time. As each Certificate matures, you can withdraw it as income or reinvest it in a new account with a higher yield.

 A typical Certificate ladder might be comprised of five accounts with terms of one year, two years, three years, and so forth. Another option is to purchase a four-rung Certificate ladder with term lengths that start at three months and subsequently mature at three-month intervals (i.e., first one matures at three months, second one at six months, etc.). Learn more about how Certificate/CD ladders work by visiting The Balance.

Certificates can prevent you from getting off track on your savings

Time deposit accounts are an excellent way to a save for a specific goal like a down payment on a house, a vehicle or even funding a vacation at a destination on your bucket list. Because there are restrictions on when you can access the money without being penalized, you’re less likely dip into it for an impulse buy, or to spend it prematurely. Instead, this money is kept clearly separated from your other accounts, and out of convenient reach until its maturity date.

The bottom line

Whether you’re saving for a future purchase, seeking an additional income stream, or simply need a safe place for money you’ve recently inherited, Certificates can be an excellent option as they provide among the highest guaranteed returns among deposit accounts. When it comes to money you aren’t willing to risk or can’t afford to lose, these principal-protected accounts are a foolproof way to add stability to your financial portfolio. At the same time, it’s important to be ensure that they are a good fit for your individual situation, and to maintain a realistic view of how they fit into an overall financial strategy. Certificates should only be used for cash you won’t need to access before the term ends, since dipping into these funds early usually results in an early withdraw penalty that will erode your returns and could possibly even mean walking away with less money than you deposited.

Moreover, even high-yield Certificate accounts won’t necessarily provide you with earnings that will outpace inflation. Bearing this in mind, Certificates are best understood as assets that can offer security and income. This means you wouldn’t typically look to them to provide the potential for growth you might expect to get from investments that enable you to build wealth through compounding earnings over a long time horizon. But when it comes to ensuring returns without risking losses, Certificates provide important advantages as a safe place for your money, and can be a vital part of a diversified portfolio.

And if you’re seeking peace of mind while earning a highly competitive APY on your money, The Police Credit Union’s Certificates offer premium value. With only $500 required to open, you can open one quickly and easily online. Our Certificates provide a guaranteed rate of return with terms ranging from three months to five years, and there are no monthly service or maintenance fees.

Current Fee Schedule

Terms & Conditions: Rates/yields are subject to change. Fees could reduce earnings on the accounts. Certificates are available for the range of days stated above. The annual percentage yield and dividend rate assume that dividends remain on deposit until maturity. After the Certificate Account is opened, you may not make deposits or withdrawals into the account until the maturity date. There is an early withdrawal penalty if you withdraw any of the funds before the maturity date. For additional terms and conditions, see About Your Accounts (pdf 267 kb) for more information.  This Credit Union is federally insured by the National Credit Union Administration.

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APR = "Annual Percentage Rate". Actual APR is based on your credit profile and may be higher than the lowest rate available. Posted rates may include promotional discounts and other terms and conditions. APY = "Annual Percentage Yield". Rates are subject to change without notice.

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