Share Certificate Shopping: How To Keep Your Money Spinning

Share Savings Certificates are an excellent savings option. They’re NCUA-insured, which gives you peace of mind in knowing your deposits are secure. They’ve got a better dividend rate than a savings account and they’re generally safer than the stock market.

Before you lock your money up, though, 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. It’s far from the end of the world if you’re wrong, but you will have to pay a small penalty to withdraw your money before the certificate matures.

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 6 months, has very small 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 are the penalties?

Penalties for early withdrawal make it difficult to impulsively take money from the account, but they’re not a deterrent if the money is needed for an emergency situation. However, like most factors about certificates, they can vary from institution to institution. Generally, the penalty is expressed as a number of months of earned dividends. For short-terms, those under one year, the penalty is between one and three months dividends. For longer-term certificates, penalties can range from 6 to 24 months of earnings. Occasionally, institutions may include a flat fee as well.

Pick a term that aligns with your need for flexibility. 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.

3.) What kind of certificate is right for you?

The language surrounding certificates can be somewhat confusing. Between jumbo, bump-up and liquid certificate options, it can be difficult to figure out which one is right. Here are some of the more common types.

A Jumbo Certificate is a certificate account with a higher minimum deposit. Financial institutions offer these to attract large investments. Jumbo options usually begin with minimum deposit requirements of around $10,000. 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.

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’ll be given the option to change the dividend rate. If you buy a certificate at 1.5% and, after 6 months, the institution is selling the certificate at 3%, you can “bump up” your rate to 3%. These certificates often come with slightly lower initial dividend rates to reflect the risk the institution is taking by being flexible about dividend rates in the future.

The opposite of a bump-up certificate is a Callable Certificate. This option lets the institution pay back the deposit early and avoid paying dividends on the remaining term of the account. If you buy a Callable Certificate at 3% and, after the “call” period is over, the institution is selling certificates at 1.5%, they can pay back your principal with the dividends you’ve accrued to that point. Since you’re taking the risk of falling dividend rates, these certificates usually come with slightly higher rates.

Similar to a Bump-up Certificate, an Add-on Certificate provides you with an opportunity to make an additional deposit at some point over the term. While you don’t get back dividends on this amount, you will earn dividends on the new amount going forward. Add-on Certificates provide you with additional flexibility to add to your savings over time.

A Liquid Certificate is like an Add-on Certificate in that it allows you to make a limited number of withdrawals over the course of the term without paying a penalty. These accounts usually have a minimum deposit and may have a certain amount of time which must pass before withdrawals can be made without penalty. These accounts are a great way to combine the rates of a certificate with the flexibility of a savings account, but dividend rates will be lower than with other more fixed-term accounts.

4.) 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.

A tenth of a percent of a dividend rate is not likely to make much of a difference over the course of the term. Most institutions are going to have rates clustered around the same rate, so other considerations should come first. Look at the terms of service, the level of support and the flexibility provided by the certificate before looking to earn another minuscule quantity of dividend.

Most importantly, you need to deposit your money with an institution you trust. Certificate agreements can be cumbersome documents, and many institutions might use that density to hide a clause that can cost you. Doing business with an institution that’s there to help you is the best move for your money in the long-term.


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