What Happens to My Savings or CD If My Bank Fails?

By Sabrina Karl

The chances of a bank failure are extremely slim these days. And the odds of your bank being seized are even more miniscule. Still, if you wonder what would happen to your deposits should that unlikely event take place, it’s easy to set your mind at ease. 

First, let’s look at the narrow odds of this happening. True, in the five years following the 2008 financial crisis, 465 banks were shuttered. But as we know, those were historically unique circumstances. In contrast, annual bank failures have numbered in only the single digits for the past three years, and so far in 2018, not a single bank has been closed by the Fed. 

With the U.S. having almost 8,000 operating banks, if eight closed in a year, that would represent just one-tenth of one percent, or a 99.9 percent “safe” rate.

But what happens to your funds if you do bank at a failed institution? The good news is that, assuming the bank is FDIC insured (the vast majority are) and you don’t hold more than $250,000 at that bank, the federal government ensures will not lose your funds or any earned interest.

That said, your deposit terms will likely change, as dictated by the bank that took over your bank. This comes into play most significantly with CDs, where the new bank is likely to offer you the choice of exiting the CD with no penalty, or continuing at a new (likely lower) interest rate.

All this means that your biggest risk will be losing an attractive rate, if you were receiving one. But since you’ll be allowed to exit your CD, and since savings, checking and money market funds can be withdrawn at any time, you’re free to shop around and take your money where you can earn more.

Why smart CD savers check the Fed’s calendar

By Sabrina Karl

Once again, the Federal Reserve has raised interest rates, the third time it has done so this year. Though no one can reliably predict how often the Fed will make increases, smart CD savers will note the Fed’s calendar.

The Fed’s rate-making body is called the Federal Open Market Committee, or FOMC, and it meets on a publicly announced schedule of every 6-8 weeks (google “FOMC calendar” for the dates). Upon the conclusion of each meeting, the committee announces its rate decision to the press

The reason this matters to CD savers is because an increase by the Fed generally ripples out to increases by banks and credit unions on their savings and CD accounts. While it won’t happen instantly, the general deposits market will move upwards.

If you have a savings or money market account, you won’t need to do anything to benefit from increases your institution makes. But with CDs, the calculus is different, since you’ll be locking in one rate for the duration of the CD’s term.

That’s why it’s smart to check the FOMC calendar to avoid locking into a new certificate right before a possible rate hike, sticking you with a lower rate than you might be able to earn if you hold of until the next FOMC decision.
From December 2008 until December 2015, the FOMC held its rate to near zero to stimulate an economic recovery after the financial crisis, and bank deposit rates tanked to historic lows. Since then, the Fed has raised rates once per year in 2015 and 2016, and now three times each in 2017 and 2018.

It’s always uncertain what the committee will decide at its future meetings, but the savvy saver knows it’s better to lock in new CD rates after, and never before, a Fed rate hike.

Why it matters whether your bank is FDIC-insured

By Sabrina Karl

Bank failures sound scary. All of a sudden, the federal bank regulators rush in unannounced and shut the operation down. And whether you hold accounts at that bank or not, you’ll find out at the same time as everyone else – after the fact.

But while that may sound scary, for the vast majority of a bank’s depositors, there really is no significant danger. That’s because the U.S. has a sophisticated, well-run insurance system called the FDIC, which protects your funds should a bank fail.

The Federal Deposit Insurance Corporation is a government entity started during the Great Depression to restore confidence in the U.S. banking system. And confidence and trust is exactly the sense it should bring you today. Because unless you have a very large sum deposited at a single bank, FDIC insurance has your back.

The way it works is that all deposits up to $250,000 held by a single individual at a single FDIC-insured bank will be reimbursed by the government if the bank is seized. But even if you have more than that amount held in bank accounts, you can still protect yourself. If you’re married, you can hold up to $250,000 in each spouse’s name, for $500,000 in total coverage. Or, you can split your deposits among more than one bank, so you don’t exceed $250,00 with any one institution.

Of course, this works if you hold your deposits at an FDIC-insured bank, which is most of them. However, banks do exist that provide private deposit insurance instead of FDIC coverage. It’s possible you’ll be just as safe with these privately insured banks, but many savers feel more comfortable sticking to government-backed insurance.

Fortunately, it’s easy to check if a bank is federally insured. Just check the bank’s materials or website for the FDIC logo.

Is a “raise your rate” CD a good choice?

By Sabrina Karl

Since CD savers generally focus on maximizing their rate of return, special certificates with a name like “Raise Your Rate” are going to grab some attention. But as with all things surrounding CD selection, you’ll be well served by shopping around and then ensuring you understand any CD’s terms before opening it.

A “raise your rate” CD, sometimes called a “bump-up CD”, offers savers a special option to increase their interest rate during the maturity period. Usually you’ll be afforded one rate bump, although some longer CDs allow for two increases.

The bank will also spell out the rules for what new rate you can capture. Generally, you’ll be allowed to take advantage of the bank’s current rate on that same CD term.

It sounds ideal, at least in periods when interest rates are on the rise. But there are still good reasons you may prefer a standard CD.

First and foremost is the cardinal rule of always shopping around when choosing a CD. Rates across banks and credit unions vary widely, especially as online access to institutions outside your community grows. So even though you can boost the rate later, your rate today still needs to be competitive compared to other CDs.

Second, beware that you can only capture a new, better rate from the same exact term as your current CD. If your original CD is an odd term, or the bank tends to release its best rates on promotional odd-term certificates, you may never have a chance to capitalize on a rate increase.

If you’ve done your research and a particular “raise your rate” CD still seems like a good buy, it certainly offers a nice perk during these days of rising interest rates. Just don’t go in without that all-important step of shopping around.

Try the CD splitting strategy to reduce your risk

By Sabrina Karl

It’s a simple contract: Deposit money in a certificate of deposit and leave it untouched for a fixed period, and the bank will pay you a higher interest rate than you’d earn from a savings account. Break the contract by removing the funds too soon and you’ll pay an early withdrawal penalty.

For those feeling certain they won’t need their funds during the CD period, the risk is inconsequential. But if you’re not quite as confident, or you’re willing to accept a slight administrative burden in exchange for minimizing any earnings impact should you need to “break” your CD early, a splitting strategy can be smart.

Splitting CDs simply means opening a number of smaller CDs rather than a single certificate. Say you’ll be investing $20,000. Instead of opening one $20,000 certificate, you can opt to open two at $10,000 each, or four at $5,000 each, or even 10 at $2,000 each.

The advantage is simple. If you unexpectedly need to access some, but not all, of your funds, you can break just one or two CDs (or however many you need) instead of the whole lump sum. This limits your penalty to what you actually withdraw, leaving earnings on the rest unscathed.

Since most CDs are fee-free, there’s no added cost to opening multiple certificates. You will, however, incur more paperwork since each CD will receive its own statement. In these days of electronic statements, however, it’s a minor trade-off.

You’ll also want to check a bank’s minimum deposit requirements. Though many offer CDs with minimums of $1,000 or even $500, some require $10,000 or more. So check terms carefully as you shop around.

CDs are a great way to maximize earnings on your unneeded cash, and by splitting certificates, you can minimize your risk at the same time.

Can you invest IRA funds in a CD? And should you?

By Sabrina Karl

Certificates of deposit can be a great tool for saving toward a short-term goal, like building up a house down payment or stashing money for a big project or dream vacation. But what about retirement? Do CDs have a place in saving for your golden years?

The first question is whether CDs are an allowable retirement investment, and the answer is yes. When you open an Individual Retirement Account, or IRA, that account is simply a container, which can hold most types of investments, from bank deposits like CDs to stocks and bonds.

Opening an IRA CD is hardly different than opening a regular CD. At most banks and credit unions, all the CDs in their regular menu are equally available in an IRA. The difference isn’t usually in the CD itself, but simply in the account where you hold it.

Occasionally, however, an institution will promote a specific IRA CD offer. These are often longer-term certificates, which typically come with a more favorable rate.

But are retirement CDs a good idea? It’s true that CDs are extremely safe and entirely predictable, so they’re well-suited well to savers who have almost no risk tolerance or a strong aversion to investing in stocks and bonds.

But since a CD’s fixed rate of return generally lags these other investments over the long term – and usually significantly – investing your IRA funds in a CD will earn you far less over time. And in order to grow your nest egg sufficiently to fund your retirement years, the more substantial gains earned in the stock market are likely to be necessary.

That said, for savers who are very close to retirement, or who wish to hold a portion of their retirement savings outside the stock market, IRA CDs are indeed safe and reliable.

Should I open a no-penalty CD?

By Sabrina Karl

Certificates of deposit are often touted as a way to earn money on your savings with virtually no risk. In terms of your principal staying intact, that’s generally true. But CDs do carry the risk of forfeiting some earnings should you cash out early. So why not invest in no-penalty CDs instead?

If you’re thinking that something that sounds too good to be true probably isn’t, you’re on the right track. No-penalty CDs aren’t a swindle, though. They’re legitimate products, offered by many reputable institutions. But though they might be smart for a particular type of saver, for most of us they leave too much money on the table.

No-penalty CDs are exactly what their name suggests: a certificate that imposes no early withdrawal penalty if you cash the CD out before its maturity date.

However, that withdrawal flexibility comes at the expense of a much lower interest rate. It’s as simple as this: If you want to maximize your earnings, you’ll need to commit to a full term, or pay the penalty if you break the contract. But if you opt to avoid penalties, the bank will pay you less interest.

The lower rate can be significant, too, to the point that you can generally find an online savings account that pays as much or more, with almost no withdrawal restrictions. So for most, it’s smarter to open a high-yield savings account if you can’t commit to a full CD term.

One scenario where a no-penalty CD can make good sense is for savers who feel they lack the discipline to keep their savings untouched. Though a no-penalty CD still allows access, it’s not as simple or quick as draining a savings account. And that added procedural obstacle might be just enough to keep them from tapping their savings.

Follow this checklist before locking into a CD

By Sabrina Karl

Although certificates of deposit are among the safest saving vehicles, not all are created equally. Indeed, since their very nature requires committing funds to sit untouched for an extended period, you’ll want to choose wisely before signing on the dotted line.

The first criteria you’ll want to consider is the interest rate. How much institutions pay varies widely in general, and additionally, many banks and credit unions offer limited-time promotional CDs. So anytime you’re in the market for a new CD, it’s worth searching the current top rates for your chosen term to create a short list of candidates.

The next checkbox is determining whether each institution is federally insured, by the FDIC (for banks) or the NCUA (for credit unions). Although you may feel comfortable opening a certificate with a privately insured institution, most savers opt to stick to accounts insured by the U.S. government.

With your list whittled to top-rate CDs from federally insured institutions, it’s time to check early withdrawal penalties. The amount the bank or credit union will charge if you cash out early ranges from completely reasonable to downright exorbitant. Avoid any CD where the penalty could eat into your principal, and then check which certificates will hit you with the lowest fee should you withdraw the money early.

These three criteria should lead you to a few great CDs. But if you’re still torn between otherwise-equal certificates, you can check their compounding periods (the more frequent the compounding, the more you’ll earn), or how customer-friendly their website is. Calling to ask questions can also give you a sense of their customer service.

The world of CD options is immense, but following the first three steps of this checklist will lead you a certificate that pays well while exposing you to very little risk.

How safe are my bank deposits?

By Sabrina Karl

For anyone stashing money in savings, nothing beats the safety of depositing it in the bank. In fact, with a small amount of homework, you can ensure that what you sock away will earn interest virtually risk-free.

The key to holding risk at near-zero is two-fold. First, the financial institution you choose matters. Banks insured by the FDIC and credit unions with NCUA insurance will protect you if the institution fails, is seized, or otherwise ceases to operate. So if an FDIC bank goes under, the U.S. government will return your funds in full.

Fortunately, the vast majority of institutions carry federal insurance, as evidenced by an FDIC or NCUA logo on their website and print materials. But it’s important to verify, as a small minority of institutions instead carry private insurance. Though some argue this equally protects you, most contend that no private insurer is as reliable as the federal government.

For those with substantial savings, it’s also important to consider how much you’re depositing. That’s because the FDIC and NCUA insure up to $250,000 for any one depositor at any one institution. If your savings fall below this threshold, you can ignore this. But note that all funds you’ve deposited with an institution – no matter the number of accounts – will apply towards the $250,000 limit.

So what to do if you have more than that on deposit? Fortunately, it’s as simple as diversifying across multiple banks or credit unions. As long as you stay below $250,000 per institution, your deposits will be fully insured.

Money deposited in a bank or credit union won’t earn as much as you might be able to in the stock market, but achieving a steady return with no risk to keep you up at night can be a worthwhile trade-off.

What is a step-up or rising rate CD?

By Sabrina Karl

Certificates of deposit are generally pretty straightforward: You choose a term and the bank pays you a fixed interest rate as long as you keep your funds there until maturity.

But some banks will throw a specialty CD or two onto their menu. One is the step-up CD, and its name can sometimes confuse. So let’s dig into what step-up certificates are, and what they’re not.

Step-up and rising rate CDs are usually the same thing. Both pay pre-established interest rates that increase at intervals throughout the term. For instance, a five-year step-up CD may pay 0.5% in Year 1, then 1.0% in Year 2, and so forth until it pays 2.5% in Year 5.

That means your true earnings are a blended rate that averages the various tiers. In the example above, the CD would pay an actual rate of 1.5% over five years.

Of course, if you cash out early on a step-up CD, not only will you be hit with an early withdrawal fee, but you’ll miss out on the higher rates you would have earned in later years.

Shopper beware that there are also bump-up and raise-your-rate CDs. With these, you can choose to raise your CD’s APY to the bank’s current (presumably higher) rate, usually once or twice during the term.

Also note that some banks have begun interchanging these terms. So while the definitions above are traditionally true, you may see a CD marketed as a step-up when actually it’s a bump-up.

Step-up CDs are typically advertised with their highest rate highlighted, so be sure to read the fine print on what the blended rate will be. It’s likely you can earn more by shopping diligently among the fixed-rate certificates. In any case, be sure you understand exactly what it is you’re looking at.

Opening savings and CD accounts for children

By Sabrina Karl

For parents looking to help their children financially, custodial accounts provide the child a gift for the future while parents save on taxes today.

Custodial accounts are held in the name of a minor but are legally managed by an adult, typically a parent or grandparent. Deposits can be made into the account, interest is earned, and the custodian retains control until the child reaches the age of majority.

The advantage for parents is that special tax rules apply, allowing up to $1,000 in earnings per year to go untaxed and a second $1,000 to be taxed at the child’s rate. Only earnings above $2,000 will find their way onto the parent’s tax return.

Among the most common custodial accounts are savings and CD accounts at a bank or credit union. With these, parents can make a lump-sum gift or periodic deposits and the principal will accrue interest modestly but with almost risk-free safety.

Opening such an account is not much more difficult than opening one for yourself, and almost all banks and credit unions offer them. Just note that you’ll need to provide personal information and a social security number for both the child and the custodian.

You’ll also need to decide whether to open an UGMA (Uniform Gift to Minors Act) account or an UTMA (Uniform Transfer to Minors Act). UGMAs can hold deposit and brokerage assets and generally transfer to the child at age 18. UTMAs, meanwhile, can also hold assets such as real estate and typically remain custodial until age 21.

As always, shopping for a top rate is smart when opening a custodial savings or CD account. Once you’ve chosen a financial institution, their representatives can answer your questions on the age of majority in your state and which account will suit your child best.

What is a jumbo CD, and should I open one?

By Sabrina Karl

Anytime you shop around for CDs, you’ll notice that, in addition to their menu of standard options, some banks and credit unions also offer an array of jumbo certificates. What are these products and do they follow different rules than regular CDs?

As you can guess, a jumbo CD simply requires a much larger deposit than a standard CD. Traditionally, the threshold for jumbo CDs has been $100,000. But with no formal rules on the minimum, some financial institutions have taken marketing liberties to apply the term to $50,000 or even $25,000 CDs.

Also historically, jumbo CDs paid higher rates than standard CDs. But ever since deposit rates plummeted and then stagnated after the Great Recession, the spread between standard and jumbo rates has greatly compressed, to the point that jumbo CDs generally pay only a tiny fraction more than regular certificates.

Everything else about jumbo CDs works the same as standard CDs. A fixed interest rate and maturity term are specified at the outset, and the account must stay funded for the full duration. If cashed out early, a penalty will be applied, and whether this is the same as the penalty for regular CDs will depend on the bank.

So if you have a large sum to save in a deposit account, should you open a jumbo CD?

As always, your best bet is to simply shop for the highest rate you can earn, at an institution you feel comfortable with, for the amount you want to invest. Whether your top find is a jumbo CD or a standard one really makes no difference, since these are just marketing names.

In fact, you may be able to maximize your return and your flexibility (should you need the cash early) by opening multiple smaller CDs instead of one large certificate.

Should I name beneficiaries for my bank accounts?

By Sabrina Karl

When most people think about designating who’ll inherit their financial assets when they die, preparing a will comes immediately to mind. But for deposit accounts, naming a beneficiary can more easily and cost effectively transfer your funds to a new owner.

Most banks and credit unions allow you to name one or more beneficiaries for any checking, savings, money market or certificate of deposit account. The legal term for this is “payable on death”, and you might see it referred to as POD. Beneficiaries can also be designated for U.S. savings bonds.

When you specify a beneficiary, you still retain all ownership and rights associated with that account as long as you live. But when you die, the beneficiary becomes eligible to take possession of those funds as their own.

The advantage is that POD designations prevent those funds from entering the probate process of settling your estate, which can be costly, lengthy and burdened with paperwork. Instead, beneficiary designations override any will and are easily settled, at no cost. The beneficiary simply has to provide the financial institution with proof of identity and a certified copy of your death certificate.

Naming beneficiaries can be done immediately upon opening a bank account, via the signature card. But if you neglect to do this at the outset, you can always add a POD designee later. You’re also free to remove and change beneficiaries any time you like, though a new signature card will be required with each change.

Naming beneficiaries for your deposit accounts is one way to provide a gift to those who inherit your assets, as it significantly reduces the paperwork, time and energy necessary to make the transfers. But be sure to periodically review your various designations to ensure they remain up to date with your current preferences.

What is an add-on CD?

By Sabrina Karl

Smart savers shop around for a good deal before locking funds into any certificate of deposit. But the more CD shopping you do, the more you discover that it’s not just “one size fits all” out there.

The vast majority of CDs fit a standard formula: you deposit a lump sum, you agree to keep it there for a set term, and the bank agrees to pay you a fixed interest rate on your funds.

But anyone who shops around will quickly notice some specialty CD types, which tweak the general structure with added flexibility or requirements on one aspect of the certificate.

One of the simplest variations is an add-on CD. With these, you still make an initial deposit, and the bank still requires a set term in exchange for a fixed rate. The difference is that these CDs don’t limit you to the initial deposit. You can add more funds over time, without changing your term or the interest rate.

Many add-on CDs allow you to add as many deposits as you like, although they’ll likely require minimum additional increments and may stipulate a maximum that can ultimately be held in the CD. But some add-on certificates specify you can make just one or two additional investments over the CD’s lifetime.

Add-on certificates are well-suited to anyone saving toward a specific goal, like a down payment for a house or car, because they allow you to incrementally sock money away while earning more than you likely would from a savings account.

Just be sure to choose a term length that aligns with your savings goal, and check that the rate is competitive. If you can earn almost as much with a savings or money market account, you may be better served by the withdrawal flexibility those accounts offer.

How is a CD’s interest paid?

By Sabrina Karl

All certificates of deposit earn interest. But not all calculate it the same, or pay it out on the same schedule. Before locking into a new CD, it’s worth checking its interest terms.

First look for how frequently the CD will compound. Compounding monthly means one month’s worth of interest will be added to the balance each month. Then the next month, that new higher balance will be used for calculating interest.

Certificates generally compound daily, monthly, quarterly or even annually. The more frequently, the better, as it allows more chances to earn interest on accrued interest.

To see the impact of different compounding periods, take the example of a five-year CD with a 2.50% APR and an investment of $20,000. If compounding annually, the CD would earn $2,628 over the five years, while the same CD with daily compounding would earn $2,663.

Although the difference might seem small, it can sometimes help you choose between two otherwise equal CDs.

The other aspect of CD interest to consider is the ability to tap interest before maturity. Most CD buyers will keep their interest accumulating within the CD, growing the balance and benefiting from compounding.

But some CDs allow you to siphon the interest into a separate account each time the CD earns an interest payment. Here again, the terms of the CD will stipulate how often that happens. Though a CD might compound daily, most banks will apply interest payments monthly or quarterly.

If your goal is to earn the highest possible return over the life of your CD, you’ll want to choose a certificate that allows interest to accumulate and be compounded. But if instead you’d like to preserve your main investment while collecting interest payouts along the way, check the terms to make sure periodic interest withdrawals are allowed.

Your smartest move when a CD is maturing

By Sabrina Karl

When you have a certificate of deposit approaching its maturity date, your bank or credit union can make things very easy on you. Do nothing and they’ll conveniently roll your funds into a new CD. But for the savvy saver, it’s usually a mistake to let them do this.

The CD marketplace is chock full of options from hundreds of institutions, in a wide variety of term lengths, interest rates and special features. And because investing in a new CD requires committing those funds for usually at least a year, and often several years, it’s wise to lock into a good deal.

In contrast, letting a CD mature without any instructions on how to handle the proceeds typically results in the bank rolling the funds into a new CD that’s as similar in length as possible to the maturing CD. So if your original certificate was a 21-month special, they’ll likely move your money into their current 24-month standard CD.

While it’s theoretically possible the standard CD offers a good return, chances are exceptionally high you’ll find a better yield by shopping around. That’s because many top-earning CDs are special odd-month terms or limited-time promotions, not standard issue certificates.

Fortunately, it’s easy to have your CD liquidated instead of auto-renewed. In the weeks before expiration, your financial institution will notify you of the impending maturity date, with instructions for informing them what to do with the funds. Generally, they provide the option to transfer the proceeds to a linked savings account, and from there, you can do what you like with the funds.

The important thing is to submit your liquidation request in time for their deadline, as the grace period is slight. You’ll then have whatever time you need to figure out the next best step for your funds.

Opening a CD? Make it bulletproof.

By Sabrina Karl

It’s true: Certificates of deposit are among the safest places to save. But that’s not to say they’re risk-free. A few important precautions will ensure the money you sock away in CDs will be there anytime you need it.

CDs are safe because they’re bank savings accounts, not investments that depend on the stock or bond market. When you open a CD, you enter into a signed agreement that stipulates exactly how much interest you’ll earn and on what schedule. Read the deposit agreement before signing and you’ll be safe from surprises.

Choosing the institution for your CD is one area where you should be vigilant, however. Most CDs you encounter will be offered by banks and credit unions that are federally insured: by the FDIC for banks and the NCUA for credit unions.

This is important because even if the bank or credit union fails, your deposits are protected. FDIC or NCUA insurance guarantees your balances up to $250,000 will suffer no loss as a result of the institution’s failure.

But be careful. There are banks and credit unions that hold private rather than federal insurance. Although they provide some protection against failure, the coverage and reliability won’t match the security provided by the U.S. government. So for complete peace of mind, do business with institutions that carry the FDIC or NCUA seal.

For some savers, the $250,000 limit can also come into play. Federal insurance covers that amount per person, per institution, with all deposits held at a bank counting toward the threshold. With amounts above $250,000 unprotected, you’re smart to spread balances among multiple institutions if you’re holding that much in bank accounts.

Sticking to federally insured institutions and staying below the maximum insurance ceiling are easy steps to ensure your CD savings will be positively bulletproof.

How will my CD earnings be taxed?

By Sabrina Karl

With the year winding down, the start of tax preparation season is just weeks away. That means employers, banks and investment firms will soon be sending you (and the IRS) forms indicating what you earned with them during the year.

If you owned any certificates of deposit in 2017, you’ll be included in these January mailings. That’s because CD earnings are considered “interest income”, making them taxable in the same way as interest earned from savings or money market accounts.

But some savers wonder when CD earnings become a taxable event. Does it matter if the interest compounds within the certificate versus being paid to a linked account? Does it depend on when you cash out the CD or when it matures?

The answer is generally no, none of those things will have an impact on your tax liability. Simply put, CD earnings become taxable when the bank or credit union applies the interest. Typically, that will mean four quarterly or twelve monthly interest payments throughout the year.

Each institution will then combine all of the interest payments into a lump sum for the calendar year, and will report this to you on a 1099-INT form. Whether the CD is still open or has matured will have no bearing on the tax obligations for that year.

One exception is CDs opened within an IRA account. Because the same rules apply to all IRA investments, interest earned on retirement CDs is not taxable until the funds are dispersed post-retirement.

Whether you own one certificate or a portfolio of dozens, the tax implications of CDs are straightforward, and unfazed by any attempt to strategize your timing. So invest your CD funds whenever it makes good sense for you, and let your bank help you do the simple tax math in January.

How much do I need to open a CD?

By Sabrina Karl

If you’ve never opened a certificate of deposit before, you might think CDs are a complex option for investing a large sum of money. While they certainly can be good investments for those with ample cash, you might be surprised how accessible they are to savers with any modest amount to sock away.

The minimum requirement to open a CD varies by individual bank or credit union – there is no set standard. And in addition to each institution choosing its own minimum, many offer multiple rate tiers for different investment amounts. Generally, the more you can deposit, the higher the rate you’ll earn.

But putting away more isn’t always necessary to earn the highest rate. Some banks have one across-the-board minimum, and saving more with them won’t change your rate. It might be $5,000 or $2,500, or even just $500 or $1,000.

That’s right. Even if you’re shopping around for a top rate (which you should always do), you can find plenty of CDs requiring just $500 to open. In fact, there are even a good handful of banks – including some large nationals – that require no minimum at all.

But small minimums can help robust savers as well. Have $10,000 available to deposit? You may be able to earn the same return on two CDs of $5,000 or four of $2,500 as you can by lumping it into a single $10,000 certificate. This gives you flexibility to cash out a portion of your CD savings should you unexpectedly need some, but not all, of the funds for an emergency.

One search of the nation’s top rates on any given day will quickly reveal there’s no rule of thumb for CD minimums. The only thing you can count on is that good options exist for savers at every level.

APR vs. APY… What’s the difference?

By Sabrina Karl

Anyone who has shopped rates – whether for putting money in a CD or savings account, or for borrowing with a mortgage or credit card – has noticed banks and lenders using two acronyms that are almost, but not quite, the same. Sometimes they quote APR, other times APY. What gives?

APR stands for Annual Percentage Rate, and is the basic rate a bank either pays for deposits or charges for a loan. It’s the fixed percentage applied to your balance over the course of the year.

But as many savers and borrowers know, interest grows when it compounds. And that’s where APY comes in. APY stands for Annual Percentage Yield, and it’s the rate you’ll actually yield as a result of compounding.

Mortgages typically compound monthly and credit cards daily. For bank deposits, compounding may occur this often, or may just happen quarterly or semi-annually. The more compounding periods in a year, the bigger the gap between APR and APY.

That’s because interest is charged on previous interest each period. Do it just twice a year and the compounding effect is slight. But if it’s done 12 or even 365 times in a year, compounding will inflate the APY to a noticeably higher number than the original APR.

From there it’s easy to see why mortgage and credit card lenders typically quote the lower APR, while banks soliciting your deposits tend to quote the higher APY.

How much of a difference can it make? Take a mortgage quoted at 4.5 percent APR. After compounding monthly, the rate you’ll actually pay by the end of the year, or the APY, will be 4.59 percent.

Understanding this allows you to ensure you’re comparing apples to apples – APR to APR, or APY to APY, but never mixed – whenever you shop rates.