If you’re willing to wait, a certificate can be a great way to earn a high-interest rate on the money you deposit.
Certificates: The Basics
A certificate is a promise that you’ll leave a certain amount of money in an account for a specified amount of time. In exchange for not accessing the money during that period, you’ll get higher interest rates on the deposited amount. The length of a certificate can vary, but anywhere between six months and five years is common. The minimum deposit is often $500. The money you put in is known as your principal, the length of the certificate is its term, and the time it ends is its date of maturity.
The interest rate and annual percentage yield determine how much you earn on a certificate. Generally, a longer-term gets a higher rate. Rates can also vary a lot from year to year.
When a certificate matures, you have a time limit to decide what to do with the money. If you wait too long, the money will be rolled over into another certificate for the same term at the current rate. If you would like to cash the certificate after it matures, you can ask the financial institution to move the money into your accounts, transfer it to another credit union or bank, or send you a check. If you end up needing the money before the certificate matures, you can withdraw it early, but you’ll face penalties.
What you actually earn on your certificate is the yield— specifically the annual percentage yield (APY). The yield depends on whether the interest is simple or compound, and how often it’s compounded. Simple interest is paid only on the principal you initially invested. Compound interest adds in the money that has been earned. To compare the two, check out the Savings Calculator in Park View’s Financial Wellness Center.