Certificates of Deposit (CDs) are simply another way to invest in your retirement with a deposit into your bank for a time-restricted investment. CDs are a type of federally insured savings account that earns more money than a typical savings account. These accounts normally have fixed interest rates (almost always) and an established or fixed date of withdrawal (maturity date). For example, if you buy a 5-year CD, you will earn more money than a savings account, but can’t take any of your money out until that 5-year date. Another great feature of CDs is they never have monthly fees. This allows your money to accrue earnings without taking into account how much you’ll lose with monthly fees that many banks require for a savings account.
What is the biggest difference between a Savings Account and CD?
Savings accounts provide much more freedom of movement in regards to your money and how you deposit or withdraw. CDs are structured in a way to ensure the bank can hold that money up to the term length you previously agreed to. Savings accounts are typically designed to accrue money over decades with a very small interest rate that we’ll get into in the next paragraph. CDs are as short as 30 days and can last up to 7 years (most choose 5 years). In general the longer the term of the CD, the more money you’ll earn in interest. With savings accounts, it doesn’t really matter hold long the term is because the Annual Percentage Yield (APY) doesn’t change.
What Are the Types of CDS?
There are many types of CDs offered through different banks, so it’s up to you to figure out which CD works best for you and your retirement strategy. There are 7 types of CDs; No Penalty CD, High-Yield CD, Jumbo CD, IRA CD, Bump-up CD, Step-up CD, and Brokered CD. The No-Penalty CD lets you forgo the withdrawal penalty, but comes with a lower AYP. The High-yield CD is the one I like the best because it generally gives a higher APY than any other CD available. The Jumbo CD operates itself from the rest with its jumbo size minimum deposit of $95,000. IRA CDs are designed to give you a tax advantage on your retirement account, which will ensure you pay lower taxes when the maturity date hits and you withdraw.
A Bump-up CD allows you t request a higher rate if your bank is doing well and offers high APY after you already sign. This type of CD gives you the flexibility to adjust your APY rate and interest rate in the flow of economic change. Step-up CDs give the investor the opportunity to increase their APY at different intervals than the traditional 1-year mark. Brokered Cds are simply a standard CD that is through a 3rd party broker, such as BBVA Compass, E-Trade, Discover bank, or Cit Bank.
How Does a CD Work?
Many people wonder how you earn interest and APY in a CD versus a Mutual Fund or Savings account. The first thing to consider is the APY, which is the interest rate you accrue annually (every year). For most CDs, that rate is around 0.30%, but you earn money from the compounded interest each month you have your money in the bank. For example, if you put $5,000 into a CD with the .75% that USAA offers for a 5-year maturity date, you’ll earn about $200 in interest after 5 years. However, the compounded interest rate will kick in every month you have your money in the CD. For example, you’ll earn about $40 every year in interest, which will give you a total of $5,040 after the 1st year. In the second year, you’ll earn interest on the $5,040 instead of the $5,000. In the 3rd year, you’ll earn around $77 instead of the $40 in interest and earn $115 in the 4th year of the CD; this is called compounding interest.
Why Should I Consider A CD?
CDs are a low-risk option of investing that provides better AYP than any other savings account. A CD is much more secure than a mutual fund because you’re required to keep your money in the bank until the maturity date. This gives the bank insurance that no matter what, they’ll have this money for the term length to invest with. With most CDs, you can get the fixed-rate so the bank can’t lower the APY after a year or 2. I have 2 CDs with a fixed-rate of .75% for 5 years, which will turn my $10,000 investment into $10,382 after 5 years. I can’t think of any other investment opportunity that you can get this kind of return in 5 years.
Why Should Choose USAA For My CD?
With many services, I always suggest going elsewhere to at least research, but not with CDs. The majority of companies, such as Wells Fargo and PNC Bank offer low APY’s of less than .30%. As far as my research has given me, the closest bank to USAA is US Bank at .60% APY at 60 months, which is really good, but still not close to what USAA offers. My recommendation is to apply for USAA CD of as much as you can afford. With an APY of .75%, you’ll be able to diversify your portfolio and accrue returns that are unheard of in the banking world. Just remember, once your maturity date hits, you have a grace period of 10 days to remove your money without penalty. After the grace period, USAA will just roll over for another 5-year term.
Are CD’s Worth it?
Absolutely, yes! CDs are great for short term investment if you don’t want to take your chances in the volatile stock market (I don’t blame you). CDs are best if you have expendable income that you for sure won’t need for the duration of the term. For example, if you already have an emergency fund stashed away and still have a few thousand that you can invest, I suggest a CD. CDs are one of the few products that USAA offers that simply can’t be touched by any other competitor.
When Would A Savings Account Be Better Than a CD?
CD’s are long term investments with a steep penalty for pulling your money out earlier than the maturity date. If you don’t have an established emergency fund (at least 3 months income), then I wouldn’t buy a CD until you get your finances straightened out. CDs are great for investors with a secure financial portfolio, but they can be counter-productive if you need your money sooner than expected. With an APY of just .05%, a USAA Savings account is a good way to get into investing and still be able to access your money when you need it. Keep in mind that if you even think you’ll have to pull money out before the maturity date, you’ll end up paying upwards of a year’s interest accrued as a penalty with a CD. A savings account is much less harsh and the penalties will be significantly less for an emergency withdrawal.
Take note of any such penalty on a CD before choosing to withdraw early. FDIC and NCUA insurance doesn’t cover penalties incurred by withdrawing money early. If there’s a chance you’ll need that cash to cover an emergency, skip the CD and stick with a high-yield savings account.
Are CDs FDIC Insured?
The Federal Deposit Insurance Corp (FDIC) was created to protect American’s in case a bank goes under with all our money invested in them. This was apart of the New Deal from FDR as a way to help get America out of the Great Depression. For example, if your bank declares bankruptcy and you have all of your money in savings, the FDIC will protect your money and ensure you get your money back. One way you can check if your bank is insured by the FDIC is type in your info on the FDIC website calculator.
The reason I put this up here is that the Navy Federal Credit Union offers significantly better rates than USAA. You can gain membership to Navy Federal in the same way you gain membership in USAA. However, Navy Federal Credit Union offers you a 1.30% for a 5-year CD, versus the .75% that USAA offers. To put this in perspective, if you invest $5,000 into a Navy Federal CD, you’ll receive $65.00 in interest after the 1st year. In the 2nd year, you’ll receive $131.00 and $198.00 in interest after year 3. So, in year 4, you’ll receive $265.00 in compounding interest with Navy Federal versus the $115.00 you’ll get with USAA. Upon the maturity date for Navy Federal, you’ll receive about $335.00 in interest versus the $178.00 after year 5 with a USAA CD.