Share Certificates 101.
Explanation of share certificates.
What’s a share certificate?
A share certificate is a long-term, money-saving product that usually offers a higher yield than that of a savings account. Instead of a regular savings, checking or money market account, where interest rates fluctuate with the economy, a share certificate is a place you can park your cash for a fixed amount of time (as short as 3-9 months, or from 1-5 years). You’ll incur penalties if you withdraw before the term is up—but on the flip side, the rate stays fixed for the length of your term. And the longer the term, the higher the dividends (quoted as Annual Percentage Yield). So if the Fed lowers rates after you’ve opened up the share certificate, your rate stays the same. Take that, Fed!
Share certificate vs. certificate of deposit (CD).
Both Share Certificates and CDs are designed to grow your savings faster in exchange for a commitment not to withdraw the principal amount before an agreed period of time. For both of types of account, if you withdraw any of the principal amount early, you typically lose any of the earnings accumulated, and there may be other penalties for early withdrawal. The main difference is that CDs are offered by traditional banks, and so they are insured by the Federal Deposit Insurance Corporation, or FDIC. Share certificates, on the other hand, are offered by member-owned, not-for-profit credit unions, and are federally insured by the National Credit Union Administration, or NCUA, for up to $250,000. Sound familiar? Since First Tech is a not-for-profit organization, any profits earned go back to members in the form of reduced fees, lower loan rates, and higher savings rates - like the kind you get from one of our share certificates.
Share certificate strategy.
You can elect to use a bump-up or “raise-your-rate" share certificate, which allows you the flexibility to increase your rate or balance during the term. Or you can use a ladder strategy, where you invest chunks of money into separate share certificates at different terms. These will “mature” (i.e., become available) at different times, giving you a balance of both higher yield and convenient access to your money. For example:
Let’s say you have $9,000 to invest. You invest in 3 different certificates at $3,000 each – a 1-year, a 2-year, and a 3-year. When your 1-year certificate matures, you roll that money into a new 3-year certificate. And when your 2-year certificate matures, roll that money into a new 3-year certificate as well. Now you’ll have a 3-year certificate maturing every year, all at the 3-year Annual Percentage Yield (APY), and you’ll still have access to your money on a regular basis, just in case.
Boom. Want more details? See how much you could earn with our savings calculators.
Or, if the market rate on APY increases significantly on a 5-year certificate, you could consider withdrawing the money early. Sometimes early withdrawal penalties aren’t significant—maybe it’s 3 months of dividends on a 5-year certificate. So it might be worth it, in order to put that money into a new certificate at a higher rate.
Finally, if you have a larger amount of money you’d like to invest safely, you may wish to opt for a jumbo share certificate, which start with a higher minimum balance.
What to look for.
Almost every financial institution offers accounts like share certificates, so how do you know which will work best for you? Your savings goals, time horizon, and future income are all factors to consider. Some of these products are built in a way that give you extra flexibility. For example, a bump-up share certificate allows you to increase the APY during the term. You may find the initial APY is slightly lower on these accounts compared to a regular certificate that doesn’t allow for a bump. Some share certificates even allow you to add money to them after opening. Perhaps you expect a bonus later in the year and wish to add that money to your account. This feature can help you earn more when market rates decrease.
Advantages of bump up and add-on certificates.
Explanation of bump up and add-on certificates.
Share certificates might be right for you.
It’s all about your relative risk tolerance. A share certificate is a very safe option—but your upside is limited to the APY. If you know you’ll need that chunk of money at some point in the future, select the certificate term that matures according to your schedule. That said, be sure you understand early withdrawal penalties, and mark your share certificate’s maturity date on your calendar. It may roll over to a new certificate, with the same term, by default.
With a share certificate at First Tech, it’s true: your money can safely earn a higher dividend. But ultimately, it’s about your comfort level with your current savings cushion, and how you feel about not touching it for a pre-determined amount of time. Have more questions? Schedule an in-person or virtual appointment.