Financial Word of the Week: Certificate of Deposit
Certificates of Deposit (CDs) are a type of savings account that generally earns you a higher interest rate than other bank accounts because you are restricted from withdrawals or deposits. You are guaranteed to earn a set interest rate throughout the term of the CD. Most institutions have CDs that range from 30 days to multiple years. If you do withdraw money from the account, you may have to pay early withdrawal penalties.
CDs were authorized in the 1960s and gained popularity during the inflation period of the 1970s because of their attractive rates. They are also insured under the Federal Deposit Insurance Company (FDIC)‡ guidelines. Given today’s low interest rate environment, you may need to weigh the benefits of being locked into a term. If rates go up, you will be stuck in a low interest rate account or pay the penalties for early withdrawal.
The highest average advertised rate on a one-year CD is 1.00% Annual Percentage Yield (APY). With that rate, it would take you 72 years just to double your money with compounding interest. Or more realistically, if you kept $1,000 in a CD for 10 years, you would only earn approximately $100 in interest. However, if you have a specific goal and time period you’re saving for, then a CD investment could make sense for you.
Next week we’ll explain how to ladder CDs and how it can help you.
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UMB Financial Corporation (Nasdaq: UMBF) is a diversified financial holding company headquartered in Kansas City, Mo., offering complete banking services, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, as well as two national specialty-lending businesses. Subsidiaries of the holding company include companies that offer services to mutual funds and alternative-investment entities and registered investment advisors that offer equity and fixed income strategies to institutions and individual investors.