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Are certificates a good investment?

There are various savings products, and certificates of deposit (certificates) are a safe option that offer a fixed interest rate that’s higher than typical savings account interest rates. Investing in a certificate has other benefits including flexible terms and investment strategy options.

Investing in a certificate requires that you keep the money in the account for a specific period, during which interest is earned. If you need regular access to your funds, buying certificates may not be the best choice.
At Credit Union of Southern California (CU SoCal), we make share certificates easy!
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgages, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.

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What are certificates of deposit and how do they work?

A certificate of deposit (certificate) is a type of savings account into which you deposit a fixed amount of money for a fixed period (such as six months, one year, or five years).
The financial institution where you open the account pays interest on your deposit amount for the duration of the specified term (timeframe).
When the term ends, you cash in your certificate, and you receive the money you originally deposited plus the earned interest.
At credit unions, including CU SoCal, certificates of deposit are simply known as “certificates.”

What do certificates earn?

The amount of interest a certificate earns depends on several factors, including:
  • Federal interest rates
  • The interest rate offered by a credit union, bank branch, or other financial institution offering the product
  • The amount you deposit
  • The term, or length of time, the certificate will be held.

Benefits of investing in a certificate:

  1. FDIC/NCUA insured. Certificate deposits are insured. A certificate account held at a bank is insured by the Federal Deposit Insurance Corporation (FDIC). A certificate account held at a credit union is insured by the National Credit Union Administration (NCUA).
  2. Fixed rate. Certificates earn a fixed interest rate.
  3. Flexible terms. Choose the term that works best for you, such as one month, three months, five months, up to five years.
  4. No risk. Certificates guarantee that you’ll receive your initial deposit amount back at the end of the term.

Drawbacks of investing in a certificate:

  • Limited access. Unless you open a no-penalty certificate, the money you deposit will be tied up for the term you choose.
  • Withdrawal penalties. If you need your money before the end of the term you will be charged a penalty fee.
  • Can miss out on other opportunities. Certificate interest rates are generally low. Locking your money into a certificate could earn you less than if you invested in the stock market, which over time tends to earn higher interest.

How to invest in certificates

There are three primary types of certificate deposit strategies:
The ladder strategy. This involves buying several certificates at one time (usually three or four) for different rates and periods of time. As each certificate matures the money can be withdrawn or deposited into another certificate. The ladder allows you take advantage of several interest rates and terms at the same time, rather than buying one certificate that lumps all your money into one term. For example, you may invest:
$1,000 in a 3-month certificate
$1,000 in a 6-month certificate
$1,000 in a 1-year certificate
The barbell strategy. This means purchasing two certificates, one a short-term certificate (such as six months) and the other a long-term certificate (such as two years). Short-term certificates pay less interest, but the benefit is you earn the interest in the short term, plus lock-in a long-term interest rate. For example, if you have $10,000 to invest, your money is split with $5,000 in each certificate.
The bullet strategy. This involves investing in one certificate at a time. You can select the maturation terms that match up, or not. For example, this year you invested $2,000 in a two-year certificate and next year you invest $3,000 in a one-year certificate.
These strategies are about taking advantage of interest rates when you have cash on hand to invest.

Alternatives to certificates

If you’re looking for ways to make your money work for you and Investing in a certificate isn’t the right fit for you, here are other financial products to consider:
Bonds. The U.S. Securities and Exchange Commission defines a bond as a debt security, like an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it "matures," or comes due after a set period.
Dividend stocks. A stock is a unit of equity also referred to as a “share.” Publicly traded companies sell shares of stock to investors as a way of raising money. Some stocks pay a dividend per share. Dividends are paid based on the company’s profitability.
Pay down high-interest debt. Before investing, it’s a good idea to pay off your high-interest debt, such as credit cards and student loans. High-interest debt will cost you thousands of dollars in interest each year. Few, if any, investments can earn enough money to cover the cost of carrying the financial burden of high-interest debt.
High-yield savings account. These savings accounts have minimum balance requirements, which, when met pay a percent or two on the account balance.
Life insurance. There are various types of life insurance and one type, called “permanent life insurance” from which you may be able to withdraw cash value. Two types of permanent life insurance that may have cash value are “whole life” and “universal life.”
Money market savings. Money market accounts are interest-bearing savings accounts, meaning that interest is paid on the account balance. Most money market accounts come with a debit card and checks, to make financial transactions easier and more convenient. When it comes to a money market vs. certificate account, the advantage of a money market account is that your funds can be withdrawn from the account several times each month without penalty.

Are certificates worth it?

Buying certificates is a personal financial decision that only you can make based on your income, expenses, current savings, and financial goals. Speak to a financial advisor or tax professional before investing to help you decide if a certificate is right for you. 

Why savvy consumers choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.

Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

Get Started on Your Certificate Account Today!


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