OnPath Credit Union

A “fixed-term” account is one where the money you deposit is locked in the account for a specific amount of time. The period of time is typically stipulated at the start, so investors know exactly how long their money will be inaccessible.

The inaccessibility of funds in fixed-term accounts varies depending on the account. For example, share certificates, like those available from OnPath Federal Credit Unions, and most certificates of deposits (CDs) available from banks, will allow you to withdraw your principal (initial deposit) at any time, but you may lose all the interest the principal had earned up to that point.

In other words, if you withdraw early, you only get back the money you initially invested and no interest – even if the fixed term was only a day away from ending (or “maturing”).

There are some accounts, like strict fixed-term deposits or non-redeemable certificates of deposit, where accessing the deposit before the maturity date is essentially impossible. However, by giving up your ability to withdraw from these funds, even in emergency situations, you’re often given a slightly higher interest rate. These types of accounts are less common because many people don’t like their savings to be entirely unreachable.

Certain types of retirement savings accounts can also be considered fixed-term accounts. For example, a pension or a 401(k) could be considered a fixed term account since you can’t withdraw the funds until you reach a certain age without having to pay early withdrawal penalties and taxes (under most circumstances).

Why Would You Invest in a Fixed-Term Account Instead of a Checking or Savings Account?

One of the key benefits of checking and savings accounts is the ease with which you can withdraw cash or spend the money (or liquidity). You can typically take out money from a savings account at any ATM, and you can make purchases with a checking account using a debit card nearly anywhere, making it essentially the same as cash.

These are very safe and accessible places to store your money – but aren’t typically considered great investment options because the interest they earn is minuscule. Even the exceptions, like high-interest savings accounts or the rare high-interest checking accounts (like our OnPath Rewards High-Yield Checking accounts with seven percent APY on deposits up to $10,000) typically have lower interest rates than fixed-term accounts.

While you can potentially earn much higher returns by investing in stocks, commodities or real estate, those types of investments have risks. Share certificates and certificates of deposit are federally insured. That means even if the credit union or bank were to fail (which is already very unlikely in modern times), you would still get your money back. They’re essentially a risk-free way to earn an annual percentage yield.

For comparison, the average APY (interest earned each year) on a traditional savings account is 0.58 percent as of the start of 2024. On a share certificate, you can often earn between four and five percent APY, depending on the length of the fixed term (longer terms earn higher yields).

However, the rates do change throughout the year depending on prevailing interest rates. The rate you lock in when you open the account is the rate you will keep for the length of the term. That means if you open a 60-month share certificate account earning 4.3 percent APY, your money will earn 4.3 percent APY for the length of the fixed-term, even if the credit union changes their rate on the product in the ensuing five years and no longer offers a 60-month 4.3 percent APY share certificate.

What About the Liquidity Problem?

The inability to access funds in a fixed-term account like a share certificate isn’t necessarily a problem if you structure your fixed-term savings using a CD ladder (or a share certificate ladder).

To start a ladder, a saver opens a number of share certificates with varying fixed terms – like 12-month, 24-month, 36-month, 48-month and 60-month accounts. If the account holder has some kind of emergency and they need money, they can withdraw from the lowest-earning account, the 12-month, without sacrificing their interest on the longer-term accounts.

Creating a ladder makes it less likely that the saver will need to withdraw money from all their accounts early and sacrifice the interest the account has earned.

If a share certificate matures and the saver doesn’t need the money, they can reinvest the funds in a longer-duration share certificate with peace of mind knowing another account will be reaching maturity in the not-too-distant future.

The Positives and Negative of Fixed-Term Accounts

Fixed-term accounts are essentially risk-free so long as the combined share certificate balance is within the federally insured threshold ($250,000), and they provide a guaranteed return on a predictable timetable.

The downside is you may be able to earn a higher rate of return with riskier investments. That being said, reliably earning those higher returns requires significant knowledge and expertise in things like the stock market or real estate. Even if you’re an expert investor or have enough funds to have an investment manager, your portfolio will still be exposed to unforeseeable risks, like global events (i.e., another pandemic or a war) and economic downturns.

Get a Reliable Return on Your Savings With OnPath Federal Credit Union

Do you want to maximize your savings return without the risks posed by a volatile stock market? Federally insured share certificates offered by OnPath FCU boast competitive yields without the risks of many other investment vehicles.

Learn more about our savings products by calling us at 800.749.6193.