We all know rising interest rates and inflation have taken a toll on budgets across the country. However, for the first time in a long time, savers are getting reaping the benefits!
If you are looking to take advantage of the higher rates, a certificate account may be the perfect item to add to your savings portfolio. Here are five questions to ask before you begin:
- Is a certificate account better than a regular savings account?
When it comes to earning more, certificate accounts top the list because they typically have higher dividend rates than a traditional savings account. It is a great place to put your money if you are saving for a large purchase that is at least six months out or if you are just not sure what you want to do with the funds yet. - Is now a good time to put money into a certificate account?
In 2022 and 2023, the Federal Reserve raised rates in order to curb inflation. The idea is that, by making borrowing costs higher, people will eventually start to spend less. This will lower the demand for goods and services, and inflation rates will follow suit. Are certificate accounts a risky investment?
The best part about investing in a certificate account is the peace of mind. Unlike the stock market, you are able to lock in the rate at the time you open your certificate so you know exactly how much you will earn during the term. Plus, your deposits are insured by the NCUA up to $250,000.Keep in mind, if you withdraw money from your certificate account before the maturity date, penalty fees may reduce your earnings.
What is the difference between a standard certificate and a growth certificate?
There are a few different certificate options available, and the features and minimums may vary depending on which financial institution you use. Do your research to choose the one that makes the most sense for your financial goals.Many people opt for standard certificates which usually require a minimum of $500 to open and have terms ranging from six months to five years. Typically, the longer the term, the higher the savings rate. Once you open this account, you cannot add additional money to it.
However, growth certificates are more flexible. You can open this account with as little as $5 and add money throughout the term at any time, subject to minimum monthly deposit requirements and cumulative cap amounts. This is a great option for someone who wants to lock in the higher rate of a certificate now but may want to save over time.
Be sure you understand all the terms and conditions before you open your account.
How can a certificate account be used strategically?
When choosing to invest in a certificate, it is important to have a strategy. The first step is to define and prioritize your financial goals.If you know you will need your money for something fairly soon, like within a year or so, consider a shorter-term certificate. If you are saving toward long-term goals, like buying a home several years down the road, put your money in a four- or five-year certificate and reap the higher dividends.
Maximize access to your funds by using a strategy called laddering. Divide the total amount of money you have to invest into five equal parts. Invest in a one-, two-, three-, four- and five-year certificate. When the one-year certificate matures, reinvest that money in a new five-year certificate. Continue reinvesting each year as the certificates mature. This will ensure you will have access to a portion of your money each year if you need it. Reinvesting is key.
Overall, certificate accounts—and other high-yield savings accounts—are an essential part of a well-rounded financial plan. Talk with a financial guide to decide what makes sense for you—and don’t be afraid to ask questions!