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 financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.