Share Certificate Savings Accounts are an excellent savings option. They’re NCUA-insured, offer a better dividend rate than a savings account, and they’re safer than the stock market.
However, before you lock your money up, there are some questions you might want to answer about your financial priorities. It’s not all about the rate – there are many other things to consider.
1. What am I saving for?
You can’t control the dividend rates that financial institutions are offering, but you can control the term of your investments. Think about when you might want to make withdrawals. If you’re saving for a rainy day fund, you might need that money very quickly. It’s best not to lock yourself into a long-term commitment since you’ll need the flexibility.
A short-term certificate, like one for six months, has minimal penalties associated with early withdrawal. Waiting a few months to finish paying for an emergency expense is far more doable than waiting a few years.
If you have a more flexible goal, like a vacation or a house, consider a longer-term certificate. A 5-year term earns a better dividend rate, and you can postpone your vacation or house hunt until you have the money to pay for it. A long-term certificate also keeps you from making an impulsive decision. If something seems like a “good deal,” you need to weigh the penalty of early withdrawal against the potential savings.
2. What kind of certificate is right for you?
The language surrounding certificates can be somewhat confusing. Between jumbo, basic, bump-up and flex certificate options, it can be difficult to figure out which one is right.
A Basic Share Certificate is just as it suggests. These certificates require smaller amounts from $500 to $2,500 to open with a variety of terms. You agree to keep your funds on deposit for a specific period and earn a rate dependent on the term. It’s that simple.
A Jumbo Share Certificate is a certificate account with a higher minimum deposit. Financial institutions offer these to attract large investments. Jumbo options usually begin with a minimum deposit requirement of up to $100,000. There are no downsides, other than having your money locked up for the term of the certificate. These are sometimes also called high-interest certificates because they tend to carry a higher dividend rate than a Basic Certificate.
A Bump-Up Certificate is one that enables you to take advantage of rising dividend rates. At some point over the life of the term, you will be given the option to change the dividend rate. This means, if you opened a certificate at 1.5% and, after 6 months, the institution is offering the certificate at 3%; you can “bump up” your rate to 3%. In most cases, you can exercise the option once during the term of the account.
An Add-on Certificate provides you the opportunity to make additional deposits during the term. You will continue to earn dividends on the new amount going forward. These certificates provide you with additional flexibility to add to your savings over time.
A Flex Certificate is a unique share certificate offered by Genisys Credit Union. This certificate takes the benefits of several certificates and rolls it into one. The Flex certificate offers three features during the term of the certificate.
- Add-on. Make additional deposits of $10 to $25,000 per day to your Flex Certificate
- Bump-up the rate one time during the term should the offered rate increase.
- Withdraw up to 25% of your principal one time throughout the term without an early withdrawal penalty.
3. How important is dividend rate?
The temptation when shopping for certificates is to jump at the highest dividend rate you can find. A better rate will mean more money, all else being equal. The problem is that all else is seldom equal.
Most institutions are going to offer rates that vary from each other only slightly. A tenth of a percent of a dividend rate is not likely to make much of a difference over the course of the term. Therefore, other considerations should be considered in addition to rate. Before looking to earn another minuscule quantity of dividend, answer these questions.
- Where do you do your other banking? Is it worth moving to another credit union or bank just for a little extra dividend?
- What level and quality of service will you receive? If it’s poor, it may not be worth any extra dividend you receive.
- What other terms besides rate are associated with the certificate? What is the penalty for early withdrawal? Are there any features like those previously addressed in this article that provides more flexibility?
4. What are the penalties?
Penalties for early withdrawal make it difficult to impulsively take money from the account, but they may be waived in certain emergency situations. The penalty is expressed as some months of earned dividends. For some, those under one year, the penalty is between one and three month’s dividends. For longer-term certificates, penalties can range from 6 to 24 months of earnings.
If flexibility is important to you, choosing a certificate with lower penalties will allow you to make withdrawals if needed. If you’re confident that the money you’re saving won’t be needed before the term of the certificate, ignoring penalty terms might allow you to secure a higher dividend rate.
When you are looking for a safe, guaranteed return on your money, Savings Certificates are a great choice. You will earn a fixed rate, guaranteed for the term you choose.
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