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What are Certificates and who should consider them?

August 01, 2014

By Roberta Pescow, NerdWallet

Ready to take your investments up a notch without a lot of stress or fuss? Then it’s time to get acquainted with certificates. Share certificates sold by credit unions are a safe way to grow your money with terms and products to fit most budgets and lifestyles.

What is a certificate?
A standard certificate is a type of savings account that pays a set dividend on a fixed amount of money for a specified period of time, or term, that ends on the maturity date. Terms may run from a month to five years or more. Investors agree to leave their money in a share certificate for the full term, or face penalties for early withdrawal. Shorter maturities generally earn a lower rate of interest than those with longer durations. Certificates are insured for up to $250,000 by the National Credit Union Administration.

If you’re thinking to yourself that certificates sound an awful lot like CDs, you’re right. A share certificate at a credit union is the same thing as a certificate of deposit (CD) at a bank.

While most certificates offer a fixed dividend for the entire term, some have variable rates that may be determined by a market index such as the prime rate, the consumer price index or yields on U.S. Treasury securities.

Why invest in a certificate?
If you’ve got cash you can comfortably lock up for a while, share certificates generally provide a better yield than a regular savings account. First and foremost, the principal is safe, thanks to NCUA insurance. By comparison, you could lose some or all of your initial investment in stocks and many bonds.

While returns on equities or bonds sometimes far outpace certificate dividend rates, share certificates provide a low-risk way to earn more on your money than is provided by a regular savings account. Additionally, your gains won’t be eroded by fees, as may be the case with other types of investments such as mutual funds or money market accounts. The huge range of maturity terms gives you the flexibility to choose certificates that provide access to your money when you expect to need it.

Fixed-dividend certificates also offer security during uncertain economic times. No matter what happens in the markets, your investment will continue to earn the rate of return you locked in at the outset. And while you’re waiting for certificates to mature, they can be used as collateral against loans.

Who should buy certificates?
Because you choose certificates with terms that suit your needs, they can work well for investors at almost all ages and stages of life:

  • Parents and grandparents might want to begin investing in certificate s for higher education 10 to 15 years before a child is expected to begin college. 
  • Young adults can invest in certificates for a few years to help save for a down payment on that first home or to pay for a wedding.
  • Middle age is the perfect time to use certificates to build a retirement fund. 
  • At any age, certificates can help save money for a special occasion.

Certificates come with a variety of options, including those that let the financial institution shorten the term (callable), those that don’t charge a penalty for early withdrawal and those with dividend rates that adjust (variable rate).

By staggering or laddering certificates, an investor can get long-term rates of return while preserving the ability to capture the benefit of increases over time. Rather than purchasing a single large certificate, break the sum you have to invest into five parts and put equal portions into a one-year, a two-year, a three-year, a four-year and a five-year certificate. When the one-year certificate matures, take the money and reinvest it in a five-year certificate. Do that again as each certificate matures and after five years, you’ll have five certificates that yield long-term dividends yet mature each year. In addition to helping you save for your goals, a certificate ladder with staggered maturities also gives you the option at the end of each term to use the money for emergencies -- an unexpected job loss, illness or accident, for instance.

Certificates offered by credit unions may earn better returns than comparable CDs provided by other financial institutions, according to NCUA data. Either way, it’s not hard to beat the yield offered by regular savings accounts.

Alliant Certificates
Alliant Certificate Accounts are flexible and offer above-market-average dividend rates locked in for the entire term. They’re the perfect way to save more and earn more with Alliant.