Why a Certificate of Deposit could help boost your saving potential
You’ve heard about Certificates of Deposit (CDs), but aren’t quite sure what they’re all about or how they may be beneficial to you. To help, we’re breaking down the basics:
What’s a CD?
A CD is an account aimed at helping you save money, money that you agree will be untouched for a certain timeframe, referred to as a “term.”
So, about these terms…
CDs are offered in a variety of terms, meaning the length of time you are planning to keep the money in the account. (Auburn Savings offers terms ranging from three months to five years.) Typically, the longer the term the higher the interest rate and Annual Percentage Yield (*APY). Because you are planning to keep the money in the account for the entire term, banks are willing to pay you a higher interest rate as compared to a regular savings or checking account. (That means you make more money on your money while it sits in the bank.) But this is also why there is a penalty to pay if you withdraw before the end of the term. Basically, the bank was counting on you to keep that money in for your agreed term; if you decide not to, you pay a penalty. However, at Auburn Savings you can withdraw the interest earned on a CD during the term without a penalty, so that’s a serious perk.
Is it safe?
Money deposited in a CD is not at risk due to fluctuations in the stock market and is therefore a much safer investment. Remember, the higher the risk, the higher the earning potential. CDs typically provide a lower rate of return than investments do, but you may sleep better at night knowing your money is safe. If you are just beginning to save, and don’t have the $500 minimum deposit needed to open a CD, start with a savings account! We offer Passbook Savings with a minimum deposit of $25 to open; these accounts are a great way to put money aside without needing a large opening deposit. Passbook Savings accounts don’t allow access via a Debit or ATM card and no electronic withdrawals are allowed. These features really help keep your savings safe from those impulse buying sprees we all go through at times. Once your account balance grows, you can simply transfer the money into a higher earning CD account. It’s our way to help you step into smart saving.
So now about the Annual Percentage Yield, otherwise known as “APY.” The APY tells you a lot… well, most of the time. It tells you the rate you earn on the money you put into the account, if you don’t make any withdrawals during the term you selected (three months, etc.). If you plan to withdraw the interest on your CD each time it’s posted, the APY really doesn’t mean anything, so choose and compare CDs based on the interest rate.
Interest can be posted on a variety of schedules—monthly, quarterly, annually and so on. Posting more frequently means you are earning interest on both the money you originally opened the account with and on the interest that was paid on the account since it was last added to your account. Interest on Interest, that’s basically the difference between the interest and the APY. Two CDs opened with the same amount of money but with different interest posting frequencies will have different ending balances. When comparing the differences of CDs, looking for the highest APY will guarantee you earn the most interest.
Many financial experts are saying we are approaching a rising rate period, so now is a good time to look for CDs that provide an opportunity to step-up your rate. Auburn Savings currently has a 3-Year Step-Up CD that offers you a one-time opportunity to raise your interest rate to the current industry rate if it becomes higher than the rate you had when it was first opened. Not only is that smart saving, it’s working the industry to your benefit.
To find out which CD is right for you, stop in to either our Auburn or Lewiston branch Monday through Friday to chat with Alicia Gaudette or Melanie Slyk. No matter how little you put aside in savings, the important thing is you’ve started and you’re doing it. For that, we applaud you.
– Martha Adams
Senior VP, Chief Operating Officer