Certificates are widely recognized as a great addition to your financial portfolio.
Certificates are issued only by credit unions and typically earn higher dividends than more traditional CDs, and they are insured just like regular savings accounts.
There are several ways to use certificates and maximize their impact on your overall financial goals. One of the best thing about certificates is that they are easy to use and don’t require you to be financially savvy, but it is worth doing some research to learn how to use them to their fullest potential.
First consider your goals and your timeline. Do you plan to go on a vacation this year, or buy a house in five years? Or maybe you just want to boost your cash savings? A certificate calculator can also help you determine the length and type of certificate that’s right for you.
Here are five tips to help you get the most out of certificates:
- Save for a specific goal. Most financial planners recommend using certificates to meet specific goals or to build already-existing cash savings. Certificates are especially good for this because they are guaranteed to grow at a specific rate over a certain period of time, they carry no risk and they are easy to establish. If saving for a summer vacation, for example, you might consider a three-month or six-month certificate. A 12-month certificate might be perfect to save money for a wedding, a bigger trip or projects like a kitchen renovation. Longer-term certificates are great to save up for a down payment on a house, or any bigger dreams you have.
- Save for retirement. Many credit unions offer Individual Retirement Account, or IRA, certificates. These are similar to IRA money market accounts, but with set time limits and generally higher rates of yield. Rollovers from other IRA accounts as well as traditional contributions are allowed, and certificates have the same tax benefits as other IRA accounts.
- Save for college. Certificates can also be used for Education Savings Accounts. Again, these work the same as other ESAs in terms of contributions and tax benefits, and can be set up by anyone – a parent, grandparent, etc. – who would like to help a child pay for college.
- Take your savings to the next level. Certificates are insured up to $250,000, so they can be a great place to stash extra cash and let it grow with no risk and no maintenance. You can also deposit a smaller amount, as little as $5 in some cases, to jump start your savings; this is dependent upon the type of certificate, as not all allow for additional deposits. Since certificates are for a specific amount of time, this is a good next step after you have already established an emergency account or other funds for immediate needs.
- Maximize earning potential. Laddering is a long-term strategy to maximize earnings from certificates, especially for those with larger amounts of cash to deposit. For example, if you divide $25,000 into five different certificates with different maturation dates, some of your funds can be available to you every year, or every two years, etc., depending on the length of the certificates. You can use that money or, more strategically, roll into a higher-earning certificate. Eventually, all your money will be in the higher earning certificates but will staggered – or laddered – and mature at different times.
Navy Federal is federally insured by NCUA