Published November 26, 2018 | Updated December 30, 2021
You've heard that saving money is important. Maybe you even set a little aside each month when you get paid. But if your plan is simply throwing a few bucks into a savings account, you could be doing more with your money. We’re talking about certificates.
Here’s your guide to getting started with certificates — including what they are and how you can use them.
What Is a Certificate?
Certificates — sometimes called certificates of deposit (or CDs) — are similar to high-yield savings accounts in that you deposit money and earn dividends. Certificates might be offered by brick-and-mortar banks and credit unions, or even online banks.
Unlike savings accounts, certificates don’t let you withdraw or deposit money once you’ve opened them. Instead, your money stays in the certificate, gaining interest for a specific length of time (the certificate’s “term”). In return, you get higher yields than you would on a traditional savings account.
IRA Certificates offer dividends like a certificate and tax advantages like an IRA.
A certificate can be more of a commitment because unlike savings accounts, certificates require a minimum deposit. Today, certificates with the best rates usually require a $1,000 deposit with term lengths ranging from six months to seven years. However, some banks and credit unions offer certificates with lower minimums and lower interest rates. Depending on the financial institution that issues your certificate, you can choose how your dividends are paid out each month. Dividends can be:
- Added back to your certificate
- Transferred to your savings, checking, or investment accounts
- Or mailed to you by check
If the initial term doesn’t pose financial hardship, you can consider a longer term or a larger deposit next time.
For those wary of investing, certificates are a very safe way to grow your nest egg — depending on the financial institution, they’re federally insured up to $250,000 by the FDIC (for banks) or the NCUA (for credit unions). That means you’re earning without risk. Also, because certificates generally have fixed interest rates, you know how much you’ll earn by the end of a certificate’s term.
How much could you earn with a certificate?
Can You Afford to Have Your Money out of Reach?
If you’re thinking about securing your money in certificates, first you need to consider your financial goals and how much you can afford. Typically, you’ll earn a better rate if you deposit more in a certificate — but earning a better interest rate probably isn’t a good idea if it risks your financial stability.
Start by looking at all your big expenses for the next year. You don’t need to go into a lot of detail, but if you’re planning on a vacation or remodeling the kitchen, you’ll want to be sure you have enough savings to handle those costs once your money is deposited in your certificate.
Today, certificates with the best rates usually require a $1,000 deposit with terms ranging from six months to seven years.
Next take a look at your emergency fund. Do you have enough cash on hand to handle any unexpected expenses? If you don’t have enough savings to comfortably cover upcoming expenses and leave a good cushion for emergencies, you may want to focus on building your savings or emergency fund before putting money into certificates.
If you don’t have enough money for a certificate with the rate you want, you can always save now for a certificate in future. Deciding how much you want to put in a future certificate can help you make a savings plan that sets you up for success.
Learn how to take your retirement savings beyond the 401(k).
It’s Okay to Start Small
If you’re uncertain about having a lot of your money locked away in a certificate, you can still earn by starting small with the minimum deposit and term rate. While you won’t earn as much as you can with a big investment, you’re still earning. This will also give you a sense of how well you can cope with part of your savings locked away. If the initial term doesn’t pose financial hardship, you can consider a longer term or a larger deposit next time.
No matter how much you deposit or how long you deposit it for, you’re earning more with a certificate than with most savings accounts.
You can still earn by starting small with the minimum deposit and term rate.
Keep Growing With Certificate Ladders
Ready for something more advanced? Laddering is a strategy that balances easy access to your money with better returns from longer investments. When you build a CD ladder, you invest in multiple certificates with different terms, allowing you to have some longer-term investments without keeping all of your money tied up for the whole term.
For example, if you were interested in depositing $5,000 in a certificate, you might instead put $1,000 in five different certificates, with terms of one, two, three, four, and five years, respectively. That means every year for the next five years, you’ll have a certificate reaching maturity.
Discover three proven certificate investment strategies.
After a year, your first certificate is accessible again if you need it — or you can put it in another five-year certificate, adding a rung to your financial “ladder.”
Decide on the amounts and durations that make the most sense for your financial plan and then set your certificates up to keep growing!
Laddering is a strategy that balances easy access to your money with better returns from longer investments.
Savings accounts are great, especially for creating reliable cash reserve for unforeseen expenses or short-term goals like vacations.
But if you really want to kickstart your savings, it’s time to explore certificates. With flexible terms and higher interest rates, you’ll grow your savings faster and on a schedule that meets your long-term savings goals.