Having some disposable income is great as it gives you the power to save for your future. But to keep yourself in great financial standing, you need to have the right place to keep your extra savings.
We already know it’s a bad idea to keep your savings in an account that brings you no interest, such as a checking account. But not everyone wants to take the risk involved with investing their savings in the stock market.
Luckily, financial institutions offer another option for individuals that want to earn guaranteed interest without assuming too much risk: certificate accounts.
Keep reading to learn what a certificate account is and how you can get started with one. You’ll also learn the answer to the question of whether you can add money to a certificate account over time and the different options available to you.
What is a Certificate Account?
A certificate account is offered by banks and credit unions and provides a fixed interest rate premium in exchange for you leaving your money untouched in said account for a fixed amount of time.
Certificate accounts are similar to regular savings accounts, except you have to agree not to access your money for a fixed term. Depending on the institution, this fixed term can be as little as one month or as long as ten years.
Once you reach the end of your fixed term, you can withdraw your money and all the interest you accrued with it — APY (annual percentage yield). It is usually possible to withdraw the principal throughout your fixed term, but at the expense of fees on your principal amount.
If you choose not to cash out at the end of the term, you can rollover your money and interest into a new certificate for another term.
Why Open a Certificate Account?
The top perk of certificate accounts is that you’re guaranteed interest earnings at the end of your term, and the only risk you take is having your money inaccessible for the duration of your term. The interest rate stays the same even if there’s a federal interest rate cut.
This guarantee also means that you have a certain level of control over your money and the type of certificate you choose. The more money you deposit into your CD, the more interest you earn. Typically, the longer your term, the higher your CD rate.
While there are several reasons to open a certificate account, there are also a few reasons that this type of savings account may not be the right place for your money.
Why Not Open a Certificate Account
A fixed-rate certificate account is a low-risk option, but that doesn’t mean that it’s the right account for everyone.
One of the most obvious obstacles of certificate accounts is that you cannot access your money for a fixed period. The longer your fixed term, the longer you go without access to your money. If you need to withdraw your money in an emergency, you have to pay a fee or penalty that takes a chunk out of your savings. You may be better off opening a high yield savings account so you always have access to your money. If you do open a certificate account, you should have a separate emergency fund or traditional savings account to draw from when needed.
Even though a certificate account brings guaranteed returns, that doesn’t mean that it gives you the maximum return for your money. Since certificates are generally low-risk options, financial institutions usually offer modest APY. The longer your time, the higher the interest rate, but it generally does not surpass 3%. If you want a higher ROI for your money, you may want to explore different higher-risk options.
Now that you know what this type of account is, let’s talk about how to add money to a certificate account.
How to Add Money to a Certificate Account
Before opening a certificate account, determine whether or not you will need access to that money throughout your fixed term.
Almost all financial institutions offer some type of certificate account, but they differ in the length of the terms they offer and their interest rates. Shop around to find the best rate before committing your money to an institution for a fixed period. Since certificate earnings are predictable, it’s a good idea to calculate the amount of earnings you’ll have at the end of your term.
You first want to consider what type of certificate account you want to open, and you have a few options. Once you choose the type of account you want, you then have to choose the length of your term. Most accounts offer terms between a couple of months and up to 10 years. Figure out how soon you may need your money to choose the right term for you.
Here are a few different types of certificate accounts for you to consider.
Traditional Certificate
A traditional or standard certificate is a typical certificate account with a fixed term and fixed interest rate where you withdraw your earnings at the end of the term. There are no other rules, and you may face hefty penalties if you choose to withdraw your money early.
Bump-up Certificate
This certificate account allows you to take advantage of rising certificate rates. However, it also means that you start at a lower interest rate than a traditional certificate.
If your bank raises its interest rate within your fixed term, a bump-up certificate allows you to request that the new interest rate applies to the rest of your term. Beware that most banks only allow you to bump up your rate once. If you want a certificate that automatically rises with the interest rate, this is known as the less common step-up certificate.
Liquid Certificate
A liquid or no-penalty certificate allows you to withdraw your money without penalty, usually after a fixed amount of time with an open account (such as seven days).
However, when opening a liquid certificate, determine whether the interest you are earning on the account is worth it. The APY on these accounts is usually much lower than a standard certificate because of the lower assumed risk.
Jumbo Certificate
A jumbo certificate is a certificate with a large deposit – typically $100,000 or more. Be aware that jumbo certificates don’t necessarily have a higher rate than traditional certificates.
There are a couple of other types of certificate accounts to choose from, but there’s only one that answers the question of whether you can add money to a certificate account over time: an add-on certificate.
Can You Add Money to a Certificate Account Over Time?
The most important thing to know about a traditional certificate account is that your money is locked in for the length of your agreed term, meaning you cannot access it without potentially heavy fees.
You also cannot add any additional funds to your certificate account once you open it with your initial deposit and throughout your fixed term.
That said, if you do want the option of adding money to your certificate account during your term and before maturity, your best option is to open an add-on certificate account.
An add-on certificate lets you deposit more money into your account after your initial deposit, similar to a traditional savings account. Your interest rate does not change even as you add additional funds, and your money remains locked in.
The process of opening an add-on certificate is similar to that of a traditional certificate, except that you can make additional deposits to your certificate beyond your initial one. The amount that you can add as well as how frequently you can add it depends on your financial institution. You may only be able to make a certain number of deposits a year or deposit up to a certain amount. Another limitation may be that you can only deposit money from certain accounts.
If you don’t want to open an add-on certificate, you have other options. There’s no limit to the number of certificates you can open, so one investment strategy is to create a certificate ladder. A certificate ladder involves opening several certificate accounts with different maturity dates. For example, you can open three accounts with 1-year, 2-year, and 3-year terms so that you can have an account that matures every year to give you continuous funds.
Can You Add Money to a Certificate Account – Pros and Cons
There are several pros and cons to opening a certificate account and even more to consider when opening an add-on certificate. The pros include:
- Fixed interest means a guaranteed return on investment. This makes certificate accounts the perfect option for those not wanting to assume too much risk.
- It doesn’t take too much to get started. Some banks allow you to make a minimum deposit as low as a few hundred dollars.
- With add-on certificates, you can add to your account throughout your term. You don’t have to miss out on time accumulating interest, saving up for a large sum for an initial deposit. You can continue to grow your certificate savings throughout your term.
As you can see, there are many benefits to opening a certificate account. However, it’s important to note that this type of account may not work for everyone. Some cons of a certificate to consider include:
- You won’t have access to your money, even with an add-on certificate. With most certificates, your money is locked away at a fixed rate for a fixed amount of time. If you find a better option for your money during your term, you don’t have the option to withdraw until the end of your fixed term.
- If you need to withdraw your money before your certificate’s maturity date, you’ll be subject to an early withdrawal penalty. You may need to pay a hefty fee that takes a significant chunk of your savings, defeating the purpose of opening a certificate in the first place.
- Due to the lower risk, certificate accounts tend to offer lower interest rates than other options for your money, such as investing. Depending on the type of certificate you choose, the rate can be even lower, such as that of an add-on certificate account.
Adding Money to a Certificate Account – Final Thoughts
For those looking to tuck away their savings without assuming too much risk, a certificate account can be an attractive option. However, make sure that this type of account works for your financial planning, as the restrictions of a certificate account can end up causing your money more harm than good if an emergency arises.
Several financial institutions offer certificate accounts. There are places to open an online certificate, or you can go to a traditional bank or credit union. It’s important to choose the right one for your savings goals. Before you commit, calculate how much money you’ll make over the term and whether you can take advantage of a higher interest rate. Determine whether you’re happy to put your money in a certificate account or want to explore other investment options, like a money market account or Roth IRA.
It’s November 1, 3:35 p.m. when it hits me. Today is the day! I quickly open the DCCU app to peek at my regular savings balance with one eye closed and the other squinty. YES!!! What did my wide open eyes behold but a nice fat deposit from my holiday savings account. One of my favorite days of the year! 
