There are things you do because you’ll be glad you did later—like brushing your teeth or eating your broccoli.
Saving money is one of them. Setting aside a nest egg protects you from financial distress in case something big happens, like a car repair or medical emergency. It also helps you prepare for big life changes like buying a house or having a baby. Yet one study found that 63 percent of Americans don’t even have enough savings to pay for a $500 to $1,000 accident, loss, or emergency. When those situations come up—as they inevitably do—most people have to fall back on their credit card or borrow money from family or friends.
While we can’t tell you how to avoid life’s little surprises, we can certainly help you build up your savings as quickly as possible. In fact, we’re going to let you in on one of the financial world’s best-kept secrets for accelerating your savings potential: Certificates of Deposit (CDs).
Most people start their nest egg with a savings account, which earns compound interest to help your money grow. But once you have a rainy day fund established, consider putting your extra funds into a CD, a low-risk savings tool that can give you a higher return on your money than many savings accounts, usually without any monthly fees. It’s the perfect place to keep any extra money you won’t need anytime soon.
How CDs work
Think of a CD as a place to plant your money for a while.
When you’re growing your own vegetables, you have to give them time to grow. CDs work in much the same way. The longer you plant your money, the higher your interest rate and the more it will grow.
When you open a CD, you can choose a term between six months and 5 years. Once you commit to a term, you can’t take your money out early without paying a penalty.
If you’re looking to earn the most possible interest for the least possible risk, you can’t go wrong with a credit union CD. They’re backed by the National Credit Union Administration and often have the highest interest rates of government-insured savings options. According to Deposit Accounts, which tracks interest rates, credit unions are often “able to offer higher deposit rates than banks” on CDs due to their member-oriented, not-for-profit model.
The financial industry is littered with terminology and jargon. Below you’ll find a list of key words associated with CDs. For starters, did you know that a CD goes by multiple names: Certificate of Deposit (CD), certificate account and certificate. Learn more below.
Certificate of Deposit (CD): Also known as certificate account or certificate. A CD is a type of deposit account where you select an amount of time where you set your money aside and cannot touch it. During this time, your original deposit – also known as a principal deposit – builds interest. When the CD matures, you’ll be able to withdraw both the principle and the interest if you choose or you can renew the CD for a longer term.
Principal deposit: The original deposit made into your certificate. This is the balance that will accrue interest over the term of the CD.
Minimum deposit: The amount required at account opening to begin accruing interest.
Term: The term is the amount of time your money will be held in a CD and will accrue interest. At OCCU, our terms range from six months to five years.
Maturity date or Maturity: The date on which the principal deposit stops accruing interest and the deposit and interest earned are made available to the original investor.
Annual percentage yield (APY): The effective annual rate earned on an account, based on compounding of interest paid at the stated dividend rate. Compounding is the effect of earning additional interest on the interest that has previously been credited to the account.
Compounding interest: Compound interest essentially means earning interest on the interest. This accumulates more than simple interest, which is calculated only on the principal deposit.
Types of CDs
At OCCU, we offer several different types of CDs.
- Regular Certificate Accounts: Invest at least $500 and earn higher interest with terms as short as six months or as long as five years.
- Jumbo Certificate Accounts: Earn even more interest by investing at least $100,000.
- Certificates with Bump Up options: Get a one-time interest rate bump if market rates increase, and make an extra deposit once during your 24 or 48-month term.
- Certificates with Pick Your Term Options: Choose any term between six months and five years—a great way to save for short-term savings goals.
When you buy a CD, it’s like adding Miracle-Gro to your money. Earn a higher return and build your savings faster with this low-risk and easy-to-use financial tool.