Blog   Tagged ‘annual interest rate’

Financial Word of the Week: FDIC

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FWOTW

You’ve seen “FDIC” logos at your bank (we hope!) and heard commercials that end with the quick disclosure “member FDIC.” But what does that mean for you? The Federal Deposit Insurance Corporation (FDIC) insures the money in your checking and savings accounts up to $250,000. If you use more than one bank, you’re also guaranteed up to $250,000 at each insured institution. That’s why financial experts advise spreading out your wealth after you reach that maximum.

The FDIC is a government agency (created in 1933 after thousands of bank failures) that manages bank insurance funds. FDIC insurance is mandatory for all U.S. chartered banks and banks that are Federal Reserve System members.

 

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When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


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.



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Financial Word of the Week: Laddering

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FWOTW

Last week, we explained how Certificates of Deposit (CDs) can be a wise option due to their higher interest rates compared to other types of bank accounts. One way to avoid early withdrawal penalties if emergencies arise is to “ladder” your CDs.

Laddering CDs involves investing your money at different maturity terms so they become available at different periods. To create a CD ladder you should research various financial institutions for the best rate. Once you identify where to invest your money, decide how much you want to invest over each term—divided evenly or unevenly. Invest the determined amount in each CD, choosing different terms.  For example if you have $30,000, invest $5,000 in each a 6, 12, 18, 24, 30 and 36 month term CD. When each CD reaches maturity you can either reinvest or take out any money that you may need.

Laddering CDs is popular during an economy where rates change frequently. Remember to ask financial institutions what their pre-payment penalties are on CDs.  Many people favor investing in a longer term CD to get the best rate and take the risk of paying an early withdrawal penalty due to the low penalties.

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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.



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Financial Word of the Week: Certificate of Deposit

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FWOTW

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.

Example
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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When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


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.



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Financial Words of the Week: APY, annual interest rate and compound interest

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FWOTW

Ever notice that sometimes your interest rate has the letters APY next to it and sometimes you just see a percentage? What do those letters mean? More importantly, how does the difference affect the money you earn in savings and pay on a loan?

First of all, you need to know that compound interest comes from the money you earn on the interestyou’ve already earned. This is one of the many reasons you want to get the highest interest rates for your savings/investing and the lowest interest rate for your loans. It differs from simple interest which only earns interest on the principal balance.

Financial institutions should give you two quotes when you are asking about interest rates: the annual interest rate and the Annual Percentage Yield (APY).

The annual interest rate is the yearly rate you earn in an investment or pay on a loan and doesn’t factor in compound interest. The annual interest rate is what the account is currently earning and only involves simple interest.

Example: If your savings account has a balance of $10,000 and an annual interest rate (no compounding) of 1 percent, then here’s how you would calculate your earnings from one year:

                                $10,000 x 1% = $100 (after one year, your account balance would be $10,100)

Annual Percentage Yield (APY) is the similar to annual interest rate, but it does factor in compounding.  This can make a significant difference when it comes to investing and borrowing.  APY is what you’ll use when comparing rates for investment/saving options.

Example: If you put the same amount of money into a savings account that utilizes APY (compounding interest of 1 percent), here’s the formula you’d use assuming the interest is compounded twice a year:

                                           $10,000 x (1 + .01/2)2 = $10,100.25 (balance after one year)

While the above examples show insignificant differences – did we really take the time to explain all this for a 25 cent difference? – the larger your interest rates and deposit  balances are, the more impact APY vs. annual interest rate will make. Remember, compound interest is your friend when you’re saving or investing and your foe when you’re taking out a loan or using a credit card.

 

 

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When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


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.



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