Top 3 Certificate Saving Strategies: Which One is Right for You?
What is a Certificate Account?
A certificate account, also known as a certificate of deposit (CD) in banking, is a type of savings account that holds a fixed amount of money for a set period (the “term”) and, in return, pays interest on a specified rate. During the term, the account holder agrees not to withdraw the money without facing penalties, but in exchange, they typically receive a higher interest rate compared to regular savings accounts.
Certificate accounts are typically insured by the NCUA (National Credit Union Administration) for credit unions or the FDIC (Federal Deposit Insurance Corporation) for banks, making them a low-risk savings option.
Certificate accounts are best for long-term savings goals such as retirement, a down payment for a home or education expenses – basically, any financial goal you have that won’t require immediate access to the funds in the account.
Ways to Use Certificate Accounts
Let’s look at three types of certificate saving strategies, the pros and cons of each, and who benefits the most from each.
Laddering Strategy
This strategy involves dividing your money into several certificates with different maturity dates. For example, if you have $15,000, you might put $5,000 in a 1-year certificate, another $5,000 in a 2-year certificate, and the remaining $5,000 in a 3-year certificate. As each certificate matures, you can either withdraw the funds or reinvest them into another certificate.
Pros:
- Steady access to funds: Since you have certificates maturing at different times, you can access your money regularly without penalties.
- Interest rate protection: If rates rise, you can reinvest maturing certificates at higher rates.
- Lower risk: Since you have certificates maturing at different times, it reduces the impact of a single bad economic period.
Cons:
- Potential lower returns: If a financial institution expects interest rates to fall in the future, they might offer lower rates on long-term certificates to avoid locking in higher rates for an extended period.
- Keeping track of multiple maturity dates: With Laddering, you’ll need to monitor all your maturity dates and decide whether to withdraw your funds or reinvest them each time a certificate matures.
Who Benefits from the Laddering Strategy?
Laddering is great for people who want steady access to their savings while earning more interest than with a typical savings or money market account. Consider this strategy if you prefer to reduce your exposure to the risks of interest rate changes over time.
Barbell Strategy
The Barbell Strategy involves putting part of your money into short-term certificates (say 1-year or less) and the rest into long-term certificates (like 5 or 10 years). Since there are no mid-term certificates with this strategy, you create a “barbell.”
Pros:
- Liquidity from short-term certificates: You get regular access to part of your savings from the short-term certificates.
- Higher potential returns: The long-term certificates might earn higher interest rates, providing better returns on your investment.
- Flexibility: You can quickly adjust the short-term portion as rates change.
Cons:
- Less middle-ground stability: If interest rates fall, you’re stuck with long-term certificates earning lower rates without the flexibility to adjust the middle portion.
- Less frequent access to higher returns: Most of the interest comes from long-term certificates, which you can’t access without a penalty until they mature.
Who Benefits from the Barbell Strategy?
The Barbell Strategy works well for those who want to maximize returns while maintaining some liquidity. It’s good for people willing to take on a bit more interest rate risk in exchange for potentially higher returns.
Bullet Strategy
With the Bullet Strategy, all your certificates are set to mature at or around the same time. For example, you might buy a 5-year certificate this year, then a 4-year certificate next year, and so on, so all your certificates mature in five years.
Pros:
- Good for specific goals: If you know you’ll need a large sum at a specific time (like buying a house), this ensures all your money becomes available at once.
- Rate flexibility over time: You can buy certificates at different points in time, which might let you capture higher interest rates in some years.
Cons:
- No short-term liquidity: Your money is tied up for the entire period, with no access unless you pay penalties.
- Interest rate risk: If rates fall over time, the certificates you buy later may earn less than earlier ones.
Who Benefits from the Bullet Strategy?
The Bullet Strategy is ideal for people with a specific financial goal in mind who don’t need access to their funds until they reach their goal. It works best for those who are saving for something expensive, like college tuition or a major purchase.
Next Steps
Now that you know about the different certificate account strategies, follow these steps to help you reach your savings goals:
- Visit Trailhead’s certificates page to find the certificate account that’s right for you and to check the latest certificate account rates.
- BONUS: While you’re there, learn more about Trailhead’s Add-On 12-Month Certificates that allow you to make additional deposits as often as you like during the term:
- Holiday Club Certificate Account – Open with $5 and save for the holidays with this certificate that matures on Nov. 1.
- Tax Saver Certificate Account – Plan ahead for tax season with this certificate that matures on Nov. 1.
- Money Builder Certificate Account – Save automatically each month through payroll deduction or automatic transfer with this 1-year certificate.
- Easy Saver Certificate Account – Under the age of 20? This 1-year certificate requires only a $10 minimum opening deposit and allows additional deposits all year long.
- Then, use Digital Banking to “add an account,” or contact Member Services for assistance:
- Call 503-220-2592
- Email info@trailheadcu.org
- Send a secure message through Digital Banking
- Visit your nearest Trailhead branch