Financial planning is about more than investing for retirement. It’s also about saving enough to reach your short-term goals, maintaining cash security and complementing your long-term investment approach.
Saving goes beyond keeping a cushion in your checking account or even building up a traditional savings account — it can be more strategic. A sound savings strategy can also include putting money in a certificate of deposit (CD) or share certificate with a bank or credit union, respectively.
When you compare CDs versus share certificates, you quickly realize that the small differences between the two often don’t make one option better than the other. Which one comes out ahead mostly depends on scoring the best interest rate and how you structure your banking relationships.
What are CDs and share certificates?
CDs and share certificates are both types of low-risk deposit accounts that allow you to grow your money at a fixed rate. However, unlike checking and savings accounts, CDs and share certificates require you to keep your money tied up for a predetermined period of time in return for — oftentimes — a higher rate of return.
Generally, CD and share certificate durations range from one month to five years or longer. Over the pre-determined term, your CD or share certificate will generate interest at a guaranteed rate. Usually — though not always — the longer the term you commit to with the bank or credit union, the higher the rate of return you’ll receive.
Keep in mind that with most CDs and share certificates, you cannot withdraw your principal investment from the account before the term has ended, or you may have to pay an early withdrawal penalty. Upon maturation of the CD or share certificate, you can withdraw your money — principal and interest — and call it a day, or you can reinvest the proceeds into another CD or share certificate.
While you can call CDs and share certificates siblings — even the National Credit Union Administration (NCUA) uses the term CD for both bank and credit union products — they’re not quite identical twins.
Differences between a CD and a share certificate
There are three main differences between a CD and a share certificate:
- Banks offer certificates of deposit; credit unions offer share certificates
- The earnings CDs produce are called interest, while a share certificate pays dividends
- CDs through banks are insured by the Federal Deposit Insurance Corp. (FDIC), while share certificates through credit unions are insured by the NCUA
Credit unions pay dividends because they’re not-for-profit entities. Credit unions perform the same functions as banks, however, members of a credit union are also owners of the credit union. Call it a co-op.
Credit unions return their profits to their members via relatively low fees and loan rates as well as competitive savings rates. If you’re a member of a credit union, think of it like being a shareholder in a for-profit company. Like these companies, credit unions distribute profits to shareholders — their members — and call these distributions dividends, while banks pay in interest.
Whether they go by interest or dividends, the earnings you earn on bank or credit union CDs or share certificates effectively work the same way.
The pros and cons of investing in CDs and share certificates
Pros of CDs and share certificates
The federal government guarantees both CDs and share certificates. This is one of the primary pros that make these accounts safe havens for cash and low-risk investments.
If you have a CD with a bank, the FDIC insures up to $250,000 of your cash per bank, per depositor. If you have a share certificate with a credit union, the NCUA insures your money, under the same terms. If a bank or credit union goes under, the FDIC and NCUA ensure that you don’t lose money — principal and interest — within the stated limits.
Though not always the case, CDs and share certificates sometimes offer higher rates of return than savings accounts. This said, some high-yield savings accounts pay the same or — in some cases — more interest than a CD or share certificate.
The term of your CD or share certificate does matter. Typically, the longer you commit to keeping your money in a CD or share certificate, the higher your rate of return. However, in the current high-interest-rate environment, this isn’t always the case.
For example, as of December 2023, Wells Fargo offers a 4.50% annual percentage yield (APY) on a three-month CD, but only 2.50% APY for six months and 1.50% APY for one year. This is likely because the bank anticipates interest rates coming down in 2024. Therefore, it doesn’t want to commit to such a high rate for a relatively long period of time.
As always, shop around to be sure. But, if you do your homework and ask your bank or credit union directly, chances are you can secure a formidable rate on a CD or share certificate.
Cons of CDs and share certificates
The flip side to high rates is the biggest con CDs and share certificates have in common: less flexibility. If you opt to withdraw your money before your term expires, you’ll likely be charged a penalty.
As always, it’s best to check the terms your bank or credit union details before putting your savings in a CD or share certificate. Some CDs and share certificates will penalize you for early withdrawals. The exact amount of the penalty will depend on your bank or credit union and its terms.
For example, Santander Bank charges three months’ interest on CDs of one year or less; six months’ interest on CDs of more than one year but less than five; and one years’ interest on CDs of five years or more.
Federal law requires banks to charge a minimum of seven days’ interest if you withdraw funds from a CD during the first six days after your deposit, but it sets no maximum penalty. It’s worth keeping in mind, too, that there are no-penalty CD options that allow you to withdraw your money early without incurring fees. If you suspect you may need access to the funds you invest in a CD or share certificate before its maturity, it’s worth exploring a no-penalty CD.
Another drawback of CDs and share certificates has to do with inflation. Current interest rates are high in general and, subsequently, on these savings vehicles because of high and persistent inflation. If the rate of inflation exceeds your rate of return on a CD or share certificate, it can erode the purchasing power of your cash over the long term.
Credit unions versus banks: Where to invest?
As of September 2023, the NCUA reports that the national average rate on a $10,000, one-year share certificate at a credit union was 3.01% compared to 2.15% at banks. Here again, if you go with online banks, you’re likely to find rates competitive with the highest rates credit unions offer as well as rates higher than overall credit union averages.
Ultimately, where you invest largely depends on your personal preference, the rate of your CD or share certificate and any potental penalty for withdrawing your money before the term expires. It pays to do your research and compare CD and share certificate terms before investing.
Frequently asked questions (FAQs)
There’s inflation risk associated with savings and investment accounts tied to interest rates. In addition, the early withdrawal penalties CDs and share certificates carry can pose a risk if you end up needing access to your money prior to maturity.
While the national average shows that share certificates pay higher rates of return than CDs, it still pays to shop around. Ultimately, the interest rate you’ll find will vary depending on the term and the amount of your investment.
Yes, you can. However, you’ll likely face penalties for early withdrawals. If you anticipate the need to withdraw money early, it could be worth exploring a no-penalty CD or share certificate.
Minimum investment requirements vary considerably. Some CDs and share certificates do not have a minimum. Others require minimums as high as $2,500 or more.
There’s really no difference between CDs and share certificates on this point. When it comes to choosing one or the other, consider your goals.
If you want to maintain an emergency fund, save for a vacation or buy a new car, short-term CDs or share certificates can work well. If you don’t need your money for quite some time and are fine with potentially earning a lower rate of return than you might get from a more aggressive investment, long-term CDs or share certificates can work for you.
In either case, consider using a CD or share certificate ladder. When you use a ladder strategy, you invest equal amounts of money into CDs or share certificates of different durations — maybe three months, six months, nine months and one year. Staggering your maturity dates means that after your initial CD or share certificate expires, you’ll have regular access to some of your money. If you don’t need it, you can always roll it over into a new CD or share certificate.
