Share Certificates, The Safer Investment

Share Certificates, The Safer Investment

Saving money when the economy is uncertain, and the markets are volatile is always a challenge. So, how do you safely invest and keep your savings growing? Enter share certificates as a safer, more secure, guaranteed way to grow your savings.

What is a Share Certificate?

A share certificate is a money-saving account that usually offers higher yields than a traditional savings account. Instead of having a fluctuating interest rate like a regular savings, checking, or a money market account, a share certificate has a fixed rate for a set term, usually starting at six months.

What is the Benefit of a Share Certificate?

Share certificates offer a safe, secure, and guaranteed way for people to invest their savings.

What are the downsides to Share Certificates?

During the agreed-upon fixed term, you will not have access to any of the deposited funds unless you agree to pay an early withdrawal penalty.

What is APY?

APY stands for Annual Percentage Yield and represents the rate of return earned on an investment, accounting for compounding interest.

What is Compounding Interest?

Compounding interest occurs when interest is earned on both the deposit and any accrued interest earned during the term. As the deposit term progresses more interest accumulates, adding more money to the principal balance which further increases the amount earned.

Essentially, each month the dollar amount increases because the previous months earned interest was added to the deposited amount – or principal.

The best way to earn from compounding interest is longer term shares with higher initial deposits and not removing any funds until the end of the term.

What is the Difference Between a Share Certificate and a Certificate of Deposit (CD)?

Share Certificates and CDs are both designed to help you grow your savings in exchange for your commitment to not to withdraw your funds during the agreed-upon term. For both CD’s and Share Certificates, those penalties are usually the amount of earnings you have accumulated.

One of the big differences between CD’s and Share Certificates is who the deposits are insured by. Share Certificates are issued by insured credit unions and are protected by the National Credit Union Association (NCUA). CD’s are issued from insured banks and are protected by the Federal Deposit Insurance Corporation (FDIC). 

The biggest difference, however, between Share Certificates and CD’s are the financial institutions themselves. Credit Unions are Non-Profit Organizations, so any profits earned by the Share Certificates go back to the member in the form of reduced fees, lower loan rates, higher savings rates, and better products and services.

How Much Are My Deposits Insured For?

Most credit unions are insured by the National Credit Union Association (NCUA). The NCUA provides insurance for member deposits up to $250,000. This insurance coverage also applies to any share certificates you open. One of the best ways to tell if a credit union is insured by the NCUA is to check their website, most credit unions will display the NCUA logo in the footer.

Do I Pay Taxes on Share Certificate Earnings?

Whatever you earn in interest on a share certificate is taxed as regular income and must be reported to the IRS.

What is the Dividend Rate on a Share Certificate?

Dividend rates on share certificates vary based on the term and opening balance of the certificate.

What to Look for When Choosing a Share Certificate

When deciding on a Share Certificate it is good to consider what will work best for you. Consider your savings goals, time frame, and your future income. You want to make sure you are getting the best return possible while still gaining access to your funds when you need them. Laddering your certificates is a great way to increase earnings and improve access to your funds.

How does Share Certificate laddering work?

Share certificate laddering is where you invest lump sums of money into multiple share certificates with different term limits while then reinvesting in the shorter limit returns into new longer-term certificates. This means you maximize your yields but also create access to your funds on a consistent basis.

For example, if you have $6,000 to invest and you deposit $2,000 in a 1-year, a 2-year, and a 3-year share certificate then roll your 1-year certificate into a 3-year at maturity and your 2-year certificate into a 3-year at maturity you will now have a 3-year certificate maturing every year giving you access to your money on a scheduled regular basis. Depending on the return percentages, it may make sense to roll one of your maturing 3-year certificates into a shorter term to take advantage of a higher APY than rolling those returns into a new 3-year certificate.

Are Share Certificates Right for Me?

When considering a share certificate, it's best to consider your risks. Share certificates are a very safe and secure option, but you are limited to the set APY. It’s also good to create a schedule for large expenses to ensure that you are choosing a share certificate that matures according to your needs. Also, be sure to understand the early withdrawal penalties just in case you need to access your money sooner.

Share certificates will help you safely earn money from your savings but ultimately it comes down to your comfort level and how soon you may need access to the deposit funds. If you are interested in opening a share certificate you can learn more about our rates on our website or you can give us a call at 207-623-1851.

*Rates and numbers are to be used for learning purposes. Please see a Maine State Credit Union financial representative for actual terms, rates, and conditions.