With a multitude of investment options available, one popular option is a certificate account.

While banks often refer to these accounts as certificates of deposit or CDs, credit unions typically refer to them as certificate accounts.

What are Certificate Accounts?

A certificate account allows you to invest your money for a specified time period (typically ranging from 1 to 5 years) of your choosing. During the term of your investment, you are not allowed to withdraw your money without incurring a penalty.

In exchange for having your money “locked-in” during your term, you’ll usually receive a higher dividend rate versus traditional savings accounts. Furthermore, certificate accounts offer guaranteed returns without risk since the National Credit Union Administration (NCUA) federally insures all accounts up to $250,000.

One caveat that can make people hesitate about investing in certificate accounts is that their money becomes locked into the account for the entire length of the term. You cannot withdraw the money before the maturity date without incurring a penalty, which could be more than the interest earned, depending on when the funds are taken out. One way to get around this factor is by “laddering” your certificate accounts.

What is Laddering?

Laddering is an investment strategy where a person will invest money in multiple certificate accounts over a variety of terms. For example, imagine you have $10,000 to invest. Instead of putting all your money in one 5-Year Certificate, you could put $2,000 in a 1-Year Certificate, $3,000 in a 3-Year Certificate, and the remaining $5,000 in a 5-Year Certificate.

single Investment

•    $10,000 (5 Year Certificate)

Laddering Investments

• $2,000 (1 Year Certificate)

• $3,000 (3 Year Certificate)

• $5,000 (5 Year Certificate)

This process allows you to gain access to some of the money in your certificate accounts sooner so that it can be reinvested, possibly at higher rates, or used however you see fit. If you put all your money into one 5-Year Certificate and rates dramatically increase in 3 years, you would have to wait 2 more years still to reinvest at these higher rates without a penalty. With laddering, you would already have funds maturing and able to take advantage of the higher returns.

How Much Should Be Invested in Different Ladders?

There is really no set amount. Each person will have their own financial goals and different level of funds available to invest. One thing to keep in mind is to figure out how much should be invested into each certificate account, what terms are ideal for you, what the rate will be, and what type of emergency plan is put into place in case something unexpected pops up.

It may be prudent to place a smaller amount of funds into certificate accounts and then create a separate emergency savings account that can be tapped into any time to cover unforeseen expenses. This method can lessen the risks of withdrawing the money out of the certificate account too soon and incurring a penalty.

Select the term lengths of your certificate accounts that best fit into your present financial situation as well as any future wealth goals. Then adjust your investments accordingly.

We’re Here to Help!

Laddering certificate accounts is a great strategy to build wealth, take advantage of future rate increases, and prevent all your money from being locked up long-term.

To learn more about Certificate Accounts or other investment options, stop by your nearest branch, visit our website, or give us a call at 540-389-0244 (local) / 866-389-0244 (toll-free).

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.