For those looking to grow their savings in a low-risk manner, term share certificates can be an excellent option. But what exactly are they? If you’re new to the concept of term share certificates, this guide will walk you through the basics and help you understand how they can fit into your financial strategy. We’ll cover what term share certificates are, how they work, and how they compare to other savings options, so you can make an informed decision about whether they’re right for you.
What is a Term Share Certificate?
A term share certificate is a financial product offered by credit unions, similar to certificates of deposit (CDs) provided by banks. When you invest in a term share certificate, you agree to leave your money deposited for a set period, or “term,” in exchange for earning a fixed interest rate. The credit union uses your deposit for various financial operations, such as lending to members, and in return, you get a guaranteed rate of return on your money.
Term share certificates are considered low risk because they are typically insured by the National Credit Union Administration (NCUA), up to $250,000 per depositor. This means your money is protected, even if the credit union experiences financial difficulties.
Key Features of Term Share Certificates
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To better understand term share certificates, it’s helpful to know some of their key features:
1) Fixed Interest Rates
Unlike savings accounts, where the interest rate may fluctuate over time, the interest rate for a term share certificate is locked in when you open the account. This allows you to predict exactly how much you’ll earn by the end of the term.
2) Specific Terms
Term share certificates have fixed terms, which can range from a few months to several years. Common terms are 6 months, 12 months, 24 months, and 60 months. Generally, the longer the term, the higher the interest rate offered.
3) Early Withdrawal Penalties
Term share certificates require you to leave your money untouched for the entire term. If you withdraw your funds before the term ends, you will likely incur a penalty, which can reduce or eliminate the interest you’ve earned. Therefore, it’s important to choose a term length that aligns with your financial goals and liquidity needs.
4) Minimum Deposits
Many credit unions require a minimum deposit to open a term share certificate, which can vary depending on the institution. These minimums typically range from $500 to $1,000, although some credit unions may offer certificates with lower deposit requirements.
5) Interest Payout Options
With most term share certificates, you can choose how you’d like to receive your interest payouts. You may opt to have the interest deposited into a separate savings or checking account, or you can let it compound within the certificate itself, potentially increasing your overall earnings.
Benefits of Term Share Certificates
Term share certificates can be a valuable addition to your financial portfolio for several reasons:
1) Safety and Security
As mentioned earlier, term share certificates are insured by the NCUA, offering the security of knowing that your investment is protected up to $250,000.
2) Predictable Returns
Because the interest rate is fixed, you know exactly how much you’ll earn over the life of the certificate. This predictability makes term share certificates a reliable option for those who prefer stability in their savings.
3) Higher Interest Rates than Savings Accounts
In most cases, the interest rates on term share certificates are higher than those on traditional savings accounts. The trade-off is that you must lock up your money for the duration of the term, but if you don’t need immediate access to your funds, this can be a more lucrative option.
4) Low-Risk Investment
For those who are risk-averse or looking for a safe place to store their money, term share certificates provide an excellent alternative to more volatile investments like stocks or bonds.
Considerations Before Opening a Term Share Certificate
While term share certificates have numerous benefits, they might not be suitable for everyone. Here are a few things to consider before you decide:
1) Liquidity
One of the main drawbacks of term share certificates is the lack of liquidity. Since you’re committing your funds for a set period, you won’t be able to access your money without paying a penalty if an unexpected expense arises.
2) Inflation
If inflation rises significantly during the term of your certificate, the purchasing power of the interest you earn could be reduced. However, because these products are typically short- to medium-term investments, the risk of inflation eroding your returns is lower than with longer-term investments.
3) Interest Rates
While the fixed interest rate is a benefit in terms of predictability, it can also be a limitation. If interest rates rise during the term of your certificate, you could miss out on higher returns. To hedge against this, some people choose to “ladder” their certificates by opening multiple certificates with different terms, allowing them to reinvest their money at higher rates if interest rates increase.
How to Choose the Right Term Share Certificate
When selecting a term share certificate, consider the following factors:
1) Term Length
Choose a term length that aligns with your financial goals. If you know you won’t need the money for a while, you might opt for a longer term to take advantage of higher interest rates. Conversely, if you think you might need the money sooner, a shorter term could be a better choice.
2) Interest Rate
Compare the interest rates offered by different credit unions to ensure you’re getting the best return on your investment. Some credit unions offer special promotions or higher rates for larger deposits.
3) Penalties and Fees
Be sure to understand the early withdrawal penalties and any other fees associated with the term share certificate. Knowing this upfront can help you avoid costly surprises later on.
In conclusion, term share certificates can be an excellent option for individuals seeking a low-risk, predictable way to grow their savings. With the right term length and interest rate, you can benefit from guaranteed returns while keeping your money safe. However, it’s essential to consider your financial goals and liquidity needs before committing to a specific term.
If you’re ready to explore term share certificates as part of your savings strategy, North Jersey Federal Credit Union (NJFCU) offers a variety of options to help you reach your financial goals. Visit NJFCU to learn more about their term share certificates and how they can work for you.