Pros and cons of a Certificate

Looking for a safe investment that avoids swings in the market? One that typically offers a higher rate of return than regular savings or checking accounts? Certificates have you covered.

With a Certificate, you put money aside for a set amount of time so it can grow at a predetermined rate. This is the same concept that a bank may refer to as a CD, or certificate of deposit.

But is it the right savings tool for your current situation? Let’s get some answers.

What are the pros and cons of a Certificate?

Pros

• Set rate for entire term — no market fluctuations
• Estimating the dividends you will accrue is easy to do
• Certificates are protected when opened at a federally insured financial institution
• Funds can be accessed in an emergency

Cons

• A commitment to leave your money undisturbed for the length of the term
• Rate fluctuation during your term can make other deposit types more appealing
• Most Certificates have early withdrawal penalties

What is a Certificate?

A Certificate account allows you to save for a specific amount of time at a specific rate. If you avoid withdrawing your money during the specified timeframe, you earn dividends at the rate you signed up for.

How does a Certificate work?

All Certificates are focused on earning you dividends in a simple, straightforward way. With any Certificate type, you give your financial institution the full amount of money you want to deposit. Those funds are held for the length of time, or term, you’ve agreed to. Your principal and accrued dividends are returned to you at maturity, or the end of the Certificate’s term. At Numerica, terms can range from 3 to 72 months.

Certificates often offer higher rates than a regular savings account. This larger payout is based on your commitment to not touch the money.

What does an initial deposit look like for Certificates?

The initial amount of money you put into your Certificate can vary. At Numerica, there is a minimum balance requirement of $1,000 for a Certificate ($500 for IRA Certificates). Most institutions only allow a one-time initial deposit. This means you can’t decide a few months down the road that you want to add more to your principal investment.

When it comes to deciding how much to put into your Certificate, consider your savings goals. For example, if you hope to buy a house in 2 years, you don’t want a Certificate with a term longer than 24 months.

What is the penalty for early withdrawals from a Certificate?

Early withdrawal penalties vary by financial institution and product. For example, you may have to forfeit some of the dividends earned. Asking about early-withdrawal penalties is an important step in determining if a Certificate is right for you.

What are the risks of a Certificate account?

While Certificates are considered a low-risk investment, there are two primary considerations to locking your funds into a time-bound Certificate.

1. The chance rates will change

When things are rough economically speaking — think recession — a Certificate keeps its value because your rate is fixed for a set term. That’s a good thing when rates are sinking. Not so much if rates go up during your locked-in term. When that happens, your Certificate may end up earning less than a high-yield savings account, for example.

2. Needing the money before maturity

Life moves, sometimes in the blink of an eye. If you need access to your principal deposit funds to help cover an emergency before the end of your term, you can make a withdrawal. But typically, a penalty will be applied.

How does a bump-rate Certificate work?

A bump-rate Certificate can take some of the sting out of the risk of rising rates. This option offers the ability to “bump up” your rate during the locked-in term of your Certificate. Ask before opening your Certificate. Some certificates allow a one-time rate adjustment over the lifetime of your Certificate. In many cases, certain conditions may apply — such as a minimum term length of your Certificate — in order to be eligible to bump your rate.

How much will I earn on a Certificate?

Certificate earnings depend on what’s happening in the marketplace. This is because rates are typically set based on economic conditions. Use Numerica’s Certificate calculator to estimate current earnings.

For a fuller discussion of your investment options, connect with a member of the Numerica Financial Services team.

Is putting money in a Certificate worth it?

Like any savings tool, it all depends on your goals and financial situation. It can be an excellent way to grow money while saving for a specific goal or setting aside funds you won’t need for a while.

What economic environment is best for investing in Certificates?

Deposit products like Certificates may benefit from a rising rate environment. When the Federal Reserve Bank raises rates to fight inflation, Certificates rates typically go up. This means higher earnings for people using Certificates to save and grow money. Keep in mind market conditions can change quickly.

Is it better to put my money in a Certificate or savings account?

This decision depends on your personal goals. If you prefer to have a small emergency fund with no restrictions, a savings account may be a more comfortable option for you.

On the flip side, if you find yourself casually dipping into your savings, a Certificate’s restrictions may keep you on track to your goals. In this instance, a Certificate of 6 months or more could limit your impulse purchases.

Are Certificates safe?

Numerica Certificates are federally insured by NCUA. Factor in a Certificate’s insulation from market fluctuations, and it is considered one of the safer investment types.

How do I open a Certificate at Numerica?

If you’re ready to open a Certificate, simply stop by a branch or call 800.433.1837. If you’d prefer, schedule a video or in-person appointment with us. We look forward to helping you reach your money goals.