Share certificates or Freedom First's Community Investment CertificatesTM
allow you to earn a good return on your money at higher interest rates than savings accounts. If you’re planning on buying a house
or a car
, keeping your down payment money in a certificate can hasten its growth toward your goal.
However, If you’re saving for two large purchases, it can be difficult to make partial withdrawals from a certificate, and doing so can hurt your earnings.
Here are three ways to solve this problem:
1.) Lump it all together
Place all your savings – your down payment, car funds, vacation savings and rainy-day money – in a single certificate.
Simplicity. One statement to review and only one document with dividends listed to unearth during tax time. Additionally, larger sums of money often earn better rates, improving your long-term returns. When you’ve achieved a savings goal, you can withdraw what you need and create a new certificate with remaining funds.
With all your money in one pot, it can be difficult to determine how close you are to each goal. You’ll also be stuck on the time frame of your shortest-term goal; if that goal is one year from now, you’ll need to close the certificate then, leaving you with a short-term rate that isn’t as profitable as a long-term rate.
The bottom line
A single certificate works best when your savings goals are on a similar time frame or if simplifying your financial life is your priority.
2.) Different certificates for different goals
You can open separate certificates for your car down payment, your house savings and your emergency fund. Each would be held in different certificate accounts, earning interest separately.
By separating your savings goals, you can lock long-term goals into long-term certificates, earning better rates. Without your money tied to your shortest goal’s term, you can stagger your terms to meet the individual needs of each of your goals, allowing you to earn better rates and make more strategic withdrawals. With more opportunities to re-lock rates, you also avoid the risk of missing better rates that may arise.
The variable interest rates make it difficult to determine your earnings. Multiple accounts preclude you from getting the best dividend rates, reserved for larger balances and for sums that exceed a certain amount, in “jumbo” certificates. In the event of an emergency that requires dipping into savings, you may have difficulty accessing a significant portion of your money.
The bottom line
Multiple certificate accounts offer flexibility and security helpful for those with a diverse range of goals.
3.) The ladder
A certificate “ladder” uses multiple long-term certificates opened at regular intervals. A ladder’s objective is to secure the best rates possible while ensuring some money is still available at regular intervals. For example, a five-year ladder involves buying a series of certificates so the five-year account is maturing each year.
A ladder is flexible and helps lock in the best available rates reserved for long-term certificates. It also protects against the drawback of those certificates by giving you the option of reinvesting when rates change and securing those better rates.
Setting up a certificate ladder requires very careful planning, and the minimum investment is much higher as you require the minimum deposit of not one, but five certificates. Additionally, only one-fifth of your savings are available at any one time. If you’re saving for a large single goal, this complicates matters considerably.
The bottom line
Ladders are a complex strategy that can maximize returns for those who are saving for flexible goals like vacations, home renovations and vehicles.
However, Certificates make saving for your goals easier and you should take advantage of them if you can.