Share Certificate Shopping – How To Keep Your Money Spinning
Share Savings Certificates are an excellent savings option. They’re NCUA-insured, 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, answer these questions:
1.) What am I saving for?
If you’re saving for a rainy day, you’ll need the flexibility to withdraw your money quickly, so consider a short-term certificate, which typically has small penalties for early withdrawal. If saving for a goal like a vacation or a house, consider a long-term certificate which earns a better dividend rate.
2.) What are the penalties?
For short terms (under one year), average penalties for early withdrawal are 1-3 months earned dividends. For longer-term certificates, penalties can range from 6 to 24 months of earnings. There may be a flat fee as well.
If flexibility is important to you, choosing a certificate with lower penalties will allow you to make withdrawals if needed. If you’re confident 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. Here are some of the more common types:
A Jumbo (or high-dividend) Certificate is an account with a higher minimum deposit – around $10,000. The only downside is having your money locked up for the term of the certificate.
A Bump-up Certificate enables you to take advantage of rising dividend rates. If you buy a certificate at 1.5%, and after 6 months (for instance), the institution is offering the certificate at 3%, you can “bump up” your rate to 3%.
A Callable Certificate lets the institution pay back the deposit early and avoid paying dividends on the remaining term. If you buy a Callable Certificate at 3% and, after the “call” period is over, the institution is offering certificates at 1.5%, it can pay back your principal in full along with the dividends you’ve accrued to that point.
An Add-on Certificate provides you with an opportunity to make an additional deposit at some point over the term. You will earn dividends on the new amount going forward.
A Liquid Certificate 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 set amount of time which must pass before withdrawals can be made without penalty.
4.) How important is dividend rate?
Although it’s tempting to grab the highest dividend rate you can find, a tenth of a percent is not likely to make much of a difference over the course of the term. Look at the terms of service, the level of support and the flexibility provided by the certificate before looking to earn another miniscule quantity of dividend.
Most importantly, deposit your money with an institution you trust. Certificate agreements can be cumbersome documents, and some 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.