What’s a Certificate and Why Should You Get One?
Looking for a guaranteed way to grow your money? Although it might not be on your radar, a certificate is a great way to securely grow your money. With guaranteed returns and minimal risk, it’s a popular way to stash your extra savings. Intrigued? Keep reading.
What’s a Certificate?
A certificate account, sometimes called a Certificate of Deposit or CD, is a type of savings account that generally comes with a high yield—much higher than traditional savings accounts, but unlike a traditional savings account, you can’t access your money anytime you’d like. Instead, you must agree to keep the funds in the account for a certain amount of time or term. Otherwise, you will likely incur early withdrawal fees or penalties.
How Does a Certificate of Deposit Work?
In a nutshell, a certificate works like a savings account—you deposit money, and your money accrues a specific fixed interest rate. This is a great way to know exactly how much you’ll earn on your initial deposit.
However, unlike a regular savings account, you must leave the money in the account for a certain amount of time to get the earned interest. Here are the main things that are unique to certificates:
- One Initial Deposit. When you open a certificate, you do so with one deposit. You can’t add additional funds to the account.
- Required Minimum Deposit. Many financial institutions require you to deposit at least $1,000 when opening a certificate. Others may require $5,000 or more.
- Fixed Term. Your certificate comes with a fixed term or the length of time the funds are required to be at the credit union. The term length can be as little as a few months to several years.
- Fixed Rate. The rate offered on the certificate remains fixed throughout the entire term. So, you’ll know exactly how much you’ll earn at the maturity date.
- Withdraw Penalties. When you open a certificate, you commit to keep your funds in the certificate for the agreed-upon term. If you withdraw your money before that date, you will typically have to pay an early withdrawal penalty or fee.
- Federally Insured. Just like your checking or savings account, a certificate is federally insured up to $250,000. That’s why certificates are considered a low-risk investment.
What Happens at Maturity?
When a certificate matures, meaning your term is up, you generally have a certain time limit to decide what to do with that money. You can either withdraw the funds (initial deposit + earnings) or put the funds into another certificate. However, if you don’t make a decision within the required time frame, your funds will usually be automatically rolled into another certificate for the same term but at the current rate. So, it’s important that you keep up with the maturity date of your certificate so that you can make the best decision. Otherwise, that decision could be made for you, and you’ll be stuck in another term. Most financial institutions give less than two weeks for you to decide.
A certificate is a great way to earn on your savings. Yes, you have to keep your money locked up for a set period of time, but in exchange, you’ll often get a higher rate than you would with a traditional savings account. And in today’s high-rate environment, the reward for putting your money into a certificate is even greater.