What is a Savings Certificate?

Your financial life is in great shape. You’ve stuck to your budget, built an easily accessible emergency fund  – and now have some additional funds to invest. As you build your wealth building strategy, one tool to consider is saving certificates.

Savings certificates are credit-union specific federally insured savings accounts with a fixed – and guaranteed – rate of interest and maturity date. You may be familiar with a similar product banks offer called certificates of deposit, or CDs.

The rates these accounts offer tend to be higher than those on savings accounts and money market accounts, but don’t open you up to the risks associated with stocks or mutual funds. Plus, there’s typically no monthly fee to keep the certificate open. So if you’re risk-averse and looking for a safe way to grow your savings, these accounts may be a good fit for you.

How do savings certificates work?

The process is pretty simple. You deposit a minimum amount of money into a savings certificate for a specific length of time. You are guaranteed a pre-determined rate of return, as long as you do not withdraw the money before the end of the specified term.

At VACU, we offer savings certificates with terms ranging from 6 to 60 months. The longer the term, the higher the rate of return. Once the term is complete, you can either withdraw the funds from the account – or reinvest them into a new savings certificate for another term.

Are savings certificates more attractive right now?

In short, yes! When interest rates are up, the good news is, savings rates are too. That is because the yields most savings certificates provide are tied to the Federal Reserve’s prime rate. In fact, savings certificates are now offering some of their highest rates of returns in decades. At Virginia Credit Union, as a member and owner of the financial cooperative, earnings are returned to you through a broad range of services including attractive rates, so you can count on our savings certificate rates being competitive.

What are savings certificates' main advantages

Savings certificates offer many benefits to investors looking for a safe and sustainable way to grow their money. These include:

 A guaranteed rate of return - Unlike many other investments, savings certificates unfailingly deliver the earnings they promise when you deposit your money.

 Low risk – VACU’s savings certificates are insured by the National Credit Union Administration up to $250,000. This means your investment is completely secure up to the insured amount.

 Higher dividend rates – Certificates offer higher yields than regular savings accounts.

 The opportunity to maximize your savings through certificate laddering, often known as cd laddering – For more on how this innovative strategy can help you get the most out of your certificate investments, click here.

What else should you consider about savings certificates?

One drawback is that you must leave the funds in the account for the full length of the original term. This means you will have no access to your money, unless you take it out before the term expires. This usually incurs an early withdrawal penalty, which varies by the term length and institution.

Another downside is that while savings certificates offer a guaranteed return, it is fixed – meaning the potential for higher returns could be found in another investment. That means a long-term savings certificate investment could keep you from capitalizing on new interest rate increases in the future.

And finally, keep in mind that savings certificates don’t offer tax advantages to shelter your income. In fact, any interest you earn will be subject to Federal or State taxes (depending on where you live). These earnings will be reported to the IRS – and you will receive a Form 1099-INT and/or 1099-OID to submit with your tax return.

When are savings certificates a good fit for your financial goals?

Savings certificates can be excellent vehicles for achieving both short- and long-term objectives.

For example, if you are looking to save for a specific expense like a vacation or an equity-building home improvement project, a short-term savings certificate can be a great way to boost your savings, while avoiding any risk – and still earning interest at the same time.

In addition, what might be a “downside” in some circumstances can actually be an advantage in others. The inability to access your cash without paying a penalty could help enforce your discipline – and ensure that the money you need for your big project is still there when the time comes.

Savings certificates can also be a great option if you’re retired or are approaching retirement. In this case, you may be more focused on protecting your assets, as opposed to growing them through more aggressive investments in, say, the stock market.

And finally, given that they are a low-risk, federally insured, but still interest-bearing investment option, savings certificates can be a great choice for anyone who is averse to risk, but still wants a guaranteed way to earn money from their assets.

Ultimately, determining your investing strategy and how savings certificates may be a part of it can be based on your own personal financial values. To learn how to identify yours, watch this.

How to open a VACU savings certificate

VACU offers our members access to a range of savings certificate products, with a range of terms and interest rates. Our minimum opening deposit is $500 for each. Our certificates compound their interest on either a monthly or quarterly basis, depending on the term length and amount invested. If you’re a member, you can add savings certificates to your account through online banking. If you’re new to VACU, you can begin opening an account online as well.