Jessica Quindlen: [00:00:00] Welcome back to the Sound Cents Podcast. I'm Jessica Quindlen. Today we're discussing all things certificates of deposit. I have with us today, Dan Leclerc, our Chief Financial Officer. Hello, Dan.
Dan Leclerc: Hello. How are you?
Jessica Quindlen: I'm fantastic. Thank you. How are you?
Dan Leclerc: Great.
Jessica Quindlen: Good. And Kevin Kapp, our VP of Treasury. Hello, Kevin.
Kevin Cap: Hello, how are you doing?
Jessica Quindlen: I'm good. So let's dive right in. What is a certificate of deposit and how do they work?
Kevin Cap: A certificate of deposit is a type of a savings account where essentially you select a term where your funds would be deposited for that fixed term, and then you earn an interest rate over that term. So, you can choose anything from say, a three-month term. You place your funds in there. They stay in there for those three months. And then after that three-month term, it matures, and you get paid your principal and interest back on that deposit.
Jessica Quindlen: Awesome. Can you do rollovers? Like, could you just keep going with it if you wanted to?
Kevin Cap: You could. You can continue to roll that CD over and either extend the term or shorten the term. There's plenty of options available to the borrower [00:01:00] when they go to take that type of investment out.
Jessica Quindlen: Awesome. What are the main benefits of saving with a certificate of deposit?
Dan Leclerc: Well, the primary benefit is you'll typically get a higher interest rate. Again, like Kevin said, when you commit to a certain term for the CD, then the institutions usually pay a higher rate to reward you for locking it up.
The other thing is you can't get your money out. So, for some people who maybe aren't as disciplined with saving and keep money in the savings account that you can just easily spend, in the certificate, it's locked up and you can't get access to it readily. So that's another benefit too. But the main benefit is going to be the higher rate, typically.
Jessica Quindlen: Great. And what are usually the terms? I know you mentioned three months. How long can a CD typically go?
Kevin Cap: Yeah, so terms typically range anywhere from 30 days on out to seven years. So, you can go out 84 months and then everything in between there. The most common types that we see people take out is that 3-month, 6-month, 9-month, one year type time frames.
Jessica Quindlen: Okay, so 3, 6, 9 months and then [00:02:00] one year?
Kevin Cap: Correct.
Jessica Quindlen: And are they typically bouncing in that way, to different kind of products or...?
Kevin Cap: Some people like to stagger out CDs so they get a decent cash flow coming back from their return.
It’s not like, as Dan mentioned, the funds are constantly locked up. They have something always maturing and coming back to them. Other people like to keep a portion, say, in their savings, checking, or money market accounts and then put an allocation into CDs. So, it's really dependent upon personal preference and what you need from a liquidity standpoint.
Jessica Quindlen: Awesome. So how - and I think you're starting to touch on that - but how can a CD or certificate of deposit help with goal planning with your finances?
Dan Leclerc: Yes. I think some great options, like I just did something for my daughter for college, right? Know when her tuition's due and we get some great rates on some CDs, so I put some money in for a six month CD, knowing it will come due and I can use that to pay the next round of tuition. Or if I want to, I could schedule like six months, 12 months, 18 months. I get stuff maturing in time for payment and stuff like that. So that's really helpful. [00:03:00]
And other times it's Just helps with a better safe return, right? That's another benefit I should add it. It's a safe return. When you lock it in there's no risk to the principal. You know, we're all NCUA insured, so the balance is insured up to $250,000, so you're not losing any of your principal and you're going to earn a decent return on it.
But as far as financial planning it helps with that. Like Kevin said, you could put money in and every time it rolls, you just keep rolling and, you know, just over time you'll see that building and that compounding of your interest grow your savings.
So to help you hit some of your goals. Or you can say, “Hey, I just came into $5, 000 for something. I want to put that aside for a vacation in two years.” Well, you can structure it with either one two year CD or structure it with different types of CDs to try to, 1) you can't spend it, and 2) you can earn a better return than a regular savings account will get you.
Jessica Quindlen: That's great. Does your rate change at all? during the term?
Dan Leclerc: No, the rate is fixed. Fixed rate. We do have a product here at Ent called a Flex CD where the member has the option to increase the CD, the rate once at their discretion. So, if [00:04:00] our rates go up after they purchase the CD, they can bump the rate up to the new rate.
And no penalty or anything like that. We also allow them to add money or withdraw money at one time with no penalty. So if you buy the CD and rates drop after you purchase a CD, you can do a one-time add to it at that same rate, at the higher rate you got into.
Jessica Quindlen: Oh, fantastic.
Dan Leclerc: Or if something comes up after you got the CD and you have an emergency, we allow you to withdraw a portion of it with no penalty one time only. So, a little bit of flexibility, hence the “Flex” name.
Jessica Quindlen: Yes, I love that name. So, what is the term of a Flex CD? Is that variable?
Dan Leclerc: They range from 24 months to 36 months.
Jessica Quindlen: Oh, great. That's fantastic. So, are there any risks associated with a certificate.
Kevin Cap: Yeah, I think one of the main risks, as Dan mentioned, is just you are agreeing to lock up your funds for a certain period of time.
You do have the capability to withdraw it if something should arise and you absolutely need it. However, you would pay a withdrawal penalty. So that is just one of the downsides to doing a CD. But I think as long as you're diligent [00:05:00] and picking the right terms that fit your schedules, that shouldn't be an issue.
Jessica Quindlen: Fantastic. Anything else we'd like to add about CDs, certificates, or financial fun?
Dan Leclerc: Yeah, I think CDs are a product that our grandparents used to use a lot. And then maybe a little bit of the mature generation where the younger generation aren't so accustomed to it. But it's a really great tool and product, especially right now with the way the rates are, where shorter term CDs are actually paying higher than longer terms.
So there's some, you can lock your money up for just a three month and get a decent rate on mid 4 percent rate. So it's something not to be afraid of. It's something very - been around for gosh, probably as long as the banking industry has probably been around almost. Banks and consumers have been buying and selling CDs. I think it's something that is very helpful in hitting financial goals and saving goals.
Especially, I really like it for those who maybe don't have the best discipline in saving. It's really easy to park your money in saving and say, “I'm not going to spend it.” Yet, you go out and you find something you want and you know you've got it sitting there, you just spend it. [00:06:00] So with a CD, you have to realize, like Kevin said, if you do want to pull that money out, you might forfeit some interest or pay a penalty.
So it's a little bit of incentive not to touch your savings, which, you know, again, you just keep building that and it helps. It helps you create a good savings plan and create that rainy day fund, so to speak, that everyone sometimes struggles to create.
Jessica Quindlen: Yes, absolutely.
Dan Leclerc: It's a good way to get that, and once you have it, you just kind of leave it and forget it and just let it keep rolling and working for you.
Jessica Quindlen: Yeah, and I have to admit, I did not know what a CD or certificate was until I started working here. I just, I had heard of them, CDs, they were a thing, but I didn't know either. One question that I just thought of, is there a minimum, you know, usual amount or balance that you need to have for a CD? Like, obviously a dollar isn't going to happen, but in general, are most institutions looking for some sort of minimum deposit for it?
Kevin Cap: Typically, we see something around $500 as a minimum deposit, depending on the type of the CD. But that's pretty typical across the industry.
Jessica Quindlen: That makes sense. Well, that brings us to the end of our show. Kevin, Dan, thanks so much for being here.
Kevin Cap: Thank you very much for having us.
Dan Leclerc: Thank you. Appreciate [00:07:00] it.
Jessica Quindlen: Thank you for listening to Sound Cents from Ent Credit Union. Be sure to follow our podcast as well as rate and review us. I'm Jessica Quindlen. I will see you next week, same time, same place.
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