OnPath Credit Union

Using Share Certificates to Build Emergency Savings

For most people, the importance of having an emergency fund set aside to cover any unexpected expenses is indisputable.

Although these amounts can vary depending on your individual financial situation, it’s recommended to have at least three to six months of living expenses saved in your emergency fund.

No matter how prudent and responsible you are with your finances, you never know when life will throw a financial curveball your way, forcing you to rely on your savings. Events like illnesses, accidents and costly car repairs can leave you strapped for cash. What better way to prepare for the unforeseen than by having money tucked away in a savings account?

If you’re thinking about building emergency savings, there are many ways to do so. A share certificate, the credit union version of a certificate of deposit (CD), allows you to store cash while also earning a higher rate of interest than a regular savings account.

The illiquidity of share certificates can make them ideal for long-term and emergency savings. Some savers are less tempted to touch emergency funds if they know there may be penalties involved with early withdrawals. However, those funds aren’t completely inaccessible, and early withdrawal may only result in the loss of some interest.

With careful planning, share certificates can be an effective tool for building up your emergency fund and providing financial security in times of need.

What Is a Share Certificate Account?

A share certificate is a type of savings account offered by credit unions. It’s considered an extremely low risk investment that pays a fixed rate of interest over a set period of time. The money deposited into the share certificate account is NCUA insured, meaning its value is insured for up to $250,000 per depositor and account in the event of a financial institution’s failure.

Share certificates (and CDs from banks) typically require a minimum deposit and have early withdrawal penalties if the funds are withdrawn before the maturity date. However, the penalty is often only the loss of interest – you shouldn’t lose any of the initial money you put into the account.

In other words, having a share certificate allows you to both save and grow your money. Although the funds aren’t as easily accessible as money in a traditional savings or checking account, it can still be accessed in case of an emergency.

Should My Emergency Fund Go Into a Share Certificate?

The answer to this question depends on your individual financial situation and goals. If your goal is to build emergency savings, investing in a share certificate may be a good idea. It may also depend on the likelihood of you needing those funds. If you believe there’s a high probability that you’ll need to access the money in the near future, it may be better to put the money in an interest-bearing savings or checking account. The interest you earn will be less but there may be fewer penalties for withdrawing funds. Just keep in mind that many interest-earning traditional savings and checking accounts also have minimum balance requirements for earning interest or avoiding fees.

Although share certificates are not liquid savings accounts, meaning you cannot easily access the funds penalty-free whenever you’d like, this can be a good thing. A regular savings account allows you to tap into your funds as you wish, which means you may be tempted to spend your hard-earned savings on unnecessary things and be left with less money than you need in case of an emergency.

Share certificate savings must stay put for a set period of time, known as a term. For example, if your term is five years, withdrawing money from your share certificate before that term ends will result in penalties. Luckily, many financial institutions in New Orleans, including the OnPath Federal Credit Union, offer flexible share certificates, with terms ranging from three months to five years.

How a Share Certificate Ladder Can Help You Build an Emergency Fund

As an alternative to a single share certificate account, you can place your savings in multiple share certificates of varying terms, known as a share certificate ladder.

Each share certificate has a different maturity date. Early withdrawals from one share certificate in an emergency won’t affect the other share certificates in the ladder, and in some cases the term of one of your share certificates may be nearing maturity when you need money.

This strategy allows you to reap the benefits of higher interest rates offered by longer-term share certificates while still having access to your money in shorter-term accounts.

For example, if you have a $5,000 emergency fund, you can choose to put $1,000 in a regular savings account with unlimited access, $2,000 into a six-month share certificate and $2,000 into a one-year share certificate. This way, some of your cash will be accessible without penalties, while the rest of your funds will be locked into share certificates where they can continue to grow.

Open a Share Certificate Account and Start Saving Today

At OnPath Federal Credit Union, our competitive rates and flexible terms make it easy to open share certificate accounts and save to meet your financial goals.

To learn more, call 800.749.6193 or visit one of our New Orleans-area branches.