Certificates for Your Cash Reserves

Certificates can be ideal vehicles for investing funds that you do not need in the near future. They are promissory notes issued by banks, credit unions or thrift institutions and are time deposits usually having maturities ranging from 30 days to as long as ten years. The most popular terms are from 90 days to five years. Since they are time deposits, certificates usually offer higher interest rates than savings accounts, but they have penalties (often 90 days of interest) for early withdrawals. 

When choosing the maturity of a certificate to buy, it is important to consider your liquidity needs and that interest rates will change over time. Certificates with longer maturities usually pay higher rates so buying a five year certificate with a 2.55% rate may be attractive today, but if rates rise in the next couple of years, you are locked into that 2.55% rate until maturity. An alternative is to use a "laddering of maturities" strategy. For example, instead of buying one five year certificate, buy equal amounts of one, two, three, four and five year certificates. As each certificate matures, you then reinvest the proceeds into a five year certificate. While you would not have as high of an initial rate, over time all your funds would end up in higher rate five year certificates and you would have annual liquidity of one fifth of your funds. If rates rise, you would take advantage of the higher rates with new purchases. If rates fall, you still have the initial higher rate certificates that you already own.

Certificates offered by banks and thrift institutions are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) and those offered by credit unions are insured by the National Credit Union Share Insurance Funds that is an arm of the National Credit Union Administration (NCUA). There are ownership rules applied to determining the insurance limit and you should thoroughly investigate these rules if you are considering having over $250,000 with a single institution.

This information has been provided by Financial Wisdom Marketing Services, Inc. and is for educational purposes only.  Content from Financial Wisdom and/or Redwood Credit Union is not, in any way, intended to provide legal, tax, or financial advice.