Creative ways to use certificates in financial planning

Certificates are low-risk investment vehicles that can help you earn interest on your money instead of leaving it sitting in a low-interest-earning checking or traditional savings account. Because certificates lock up your funds for a fixed period, they are sometimes overlooked in financial planning. However, there are many creative ways to use certificates that allow them to fill unique roles in a comprehensive financial plan.

You might think of a certificate as a set-it-and-forget-it type of investment, one where you simply park your money and wait until it matures. But, there are more dynamic approaches, such as certificate laddering, which open up a whole new world of possibilities for these unique savings tools.

Below, we'll guide you through a variety of powerful methods to help you get the most out of your certificates by incorporating them seamlessly into your overall financial strategy.

What you’ll learn

• What are certificates?
• Creative uses for certificates
• Certificate ladder strategy
• Certificate barbell strategy
• Certificate bullet strategy
• Using certificates for retirement planning

What are certificates?

Certificates are savings accounts offered by credit unions that give you a fixed interest rate for a set term (banks offer an equivalent product known as a certificate of deposit aka a CD). When you open a certificate, you agree to deposit a certain amount of money for a specific period of time, known as a term. These terms can be as short as a few months or as long as five years. In return, the credit union pays you a set interest rate, typically at a much higher annual percentage yield (APY) than a traditional savings account. At the end of the term, you get your initial deposit back, plus any interest earned.

Certificates are known for being stable and predictable. Unlike stocks or mutual funds, a certificate’s value doesn’t fluctuate, making it a good choice for more conservative investors who want to keep their principal safe. Additionally, most certificates are NCUA-insured up to $250,000 per depositor, per institution, meaning your money will remain protected.

Creative uses for certificates

As mentioned, there are multiple ways to use certificates that go beyond simply parking your money in a single account and waiting for it to mature. Here are a few examples of how you can creatively use certificates to your advantage.

Certificate ladder strategy

A certificate ladder is a strategy that involves dividing your investment into several smaller certificates with different maturity dates instead of putting all your money into one certificate. For example, instead of investing $15,000 into a single 5-year certificate, you could invest $5,000 into three different certificates: a 6-month certificate, a 3-year certificate, and a 5-year certificate. This way, one certificate matures every other year, providing you with periodic access to your funds.

The primary benefits of a certificate ladder are liquidity and the potential for higher interest rates. By having certificates maturing at different times, you can access your money regularly without penalties, making it useful for unexpected expenses or new investment opportunities. Additionally, longer-term certificates typically offer higher interest rates, allowing you to maximize returns on part of your investment while maintaining liquidity with shorter-term certificates.

When to use a certificate ladder

• Emergency funds: Keep emergency savings earning interest while ensuring some funds are always accessible.
• Retirement planning: Help ensure a steady income stream during retirement by timing certificate maturities to coincide with income needs.
• Saving for specific goals: For medium- to long-term investment goals like home renovations, vacations, education expenses or a downpayment on a house, where you can align the maturity dates with the anticipated need for funds.

Certificate barbell strategy

Think of the certificate barbell strategy as a more extreme version of the certificate ladder. Instead of evenly distributing your investment across multiple certificates, you invest in two extremes: short-term and long-term certificates. This approach allows you to benefit from the higher interest rates of long-term certificates while maintaining liquidity with short-term certificates. For example, you might invest half in a 12-month certificate and the other half in a 5-year certificate.

The goal is to balance higher returns with frequent fund availability. Like the ladder method, you can use or reinvest funds from maturing short-term certificates to continue the strategy.

When to use a certificate barbell

Certificate barbells are generally considered to be riskier than certificate ladders due to lower diversification, relying on fewer certificates. This strategy is often used when there is an interest rate increase expected to occur soon, allowing you to reinvest short-term certificates at higher rates. Keep in mind that if rates don't increase, you might earn lower returns than with a ladder.

Certificate bullet strategy

The certificate bullet strategy is the most straightforward certificate investing method. It involves focusing on one specific certificate term with the highest interest rate and investing all your funds into it. This maximizes returns by leveraging the highest available rates.

However, this strategy offers little flexibility or liquidity. Once invested in a long-term certificate, your funds are locked until maturity, with no opportunity for reinvestment or early withdrawal.

When to use the certificate bullet strategy

This strategy is best when you have a specific financial goal or need that aligns with the certificate's maturity date. For example, if you need funds for a downpayment on a home in three years, investing in a 3-year certificate with the highest possible interest rate can be ideal. It's also beneficial when you have a lump sum of money, such as an inheritance or bonus, that you don't need immediate access to, allowing you to maximize returns without frequent monitoring.

Using certificates for retirement planning

Certificates play a valuable role in retirement planning. Here are some ways to integrate certificates into your overall retirement strategy:

Stability and risk management

As mentioned earlier, certificates offer stable and predictable returns, making them a low-risk option for those approaching retirement age. Unlike stocks or mutual funds, they offer guaranteed returns and protect your principal investment. This makes them an excellent choice for risk-averse investors who prioritize preserving their capital, especially as they approach retirement.

Role of certificates in diversifying retirement investments

Diversification is key to a balanced retirement portfolio. Certificates can complement more volatile investments like stocks and bonds by providing a stable source of growth and reducing overall investment portfolio risk. The idea is to use them as a buffer to mitigate the impact of market downturns on your overall retirement savings.

Strategies for generating retirement income using certificates

One primary concern for retirees is generating a steady income stream. Certificates can effectively supplement retirement income, especially with multiple certificates maturing at different times.

• Laddering certificates: Align certificate maturities with your retirement timeline by scheduling certificates to mature when you need funds for daily living costs, healthcare expenses or other financial needs. This helps ensure you have funds available when needed, avoiding penalty fees from premature withdrawals.
• Compounding interest: Reinvest certificate interest into new certificates to leverage the power of compounding. This continuous growth helps preserve purchasing power over time, which is crucial for retirees on a fixed income, especially during time periods with the high inflation risk.