Share Certificates Deliver Predictably Strong Returns

A share certificate is usually more rewarding in returns than a traditional savings account, and less risky than other investment options. Share certificates may be a good fit for investors seeking strong returns without the potential for loss that comes with stocks and bonds. For those new to share certificates, here is a primer on what they are and who might consider one.

Share certificates 101

Unlike a regular savings account, which allows penalty-free withdrawals, a share certificate requires that the money goes untouched until the certificate matures or reaches the end of its term – often from six months to five years. A key advantage of certificates compared with regular savings accounts is that certificates accumulate a predictable, locked-in return in exchange for leaving the funds alone, whereas the interest paid on regular savings can vary.

Like savings accounts, the National Credit Union Administration (NCUA) insures share certificates for up to $250,000. As long as you have more than $500 to invest and are comfortable not having access to the funds for a period of time (or paying penalty fees if you withdraw funds early), a share certificate can be a good way to put money to work.

Who should use share certificates

Share certificates are among the highest-yielding government-backed investment options available. Longer-term investments with larger sums typically provide the most advantageous ways to use share certificates. If an investor needs to withdraw money before the maturity date, penalty fees may apply. If you do not have an emergency fund, investing too much in a share certificate can be risky. For those with only a little cash tucked away, a regular savings account may be a better choice. While these pay lower interest rates, there are generally no withdrawal penalties.

The limited risk makes share certificates an appealing option for financially comfortable and retired investors. For those with the ability to allocate assets across a variety of investments, share certificates provide a high-yield savings product. As investors age, experts advise reducing risk to protect accumulated wealth.

Making the most of your money

Retired and wealthy investors who have more flexibility with funds may consider spreading assets across several share certificates with different maturities, employing a strategy called laddering. As each share certificate comes to term, reinvest the funds in another certificate to maintain a steady stream of interest income.

If commitment to a long-term share certificate is a concern, especially with prospects of interest rates rising in the not-too-distant future, consider a bump-up account, which allows the investor a penalty-free opportunity to raise the interest rate once during an 18-month term, or twice in a 30-month term certificate.

If market conditions make you nervous, relatively risk-free share certificates may make it easier to relax as your savings earn interest.

Visit altaone.org for more information on our term share certificates.

Cait Klein, NerdWallet

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