Vital Facts About CD APYs to Know Before Investing


Retirement. College. Traveling. All these adventures require money ahead of time.

In most cases, people aren’t as prepared as they imagine they are. One way to do that is to make sure your investments are wise and working for you. Whether you’re paying for college or you’re going on a trip, being prepared financially is critical.

One way to do just that is to invest in CD products. These deposit accounts help your money work for you instead of against you. However, there are terms you’ll run into that you need to be able to understand. For example, terms such as annual percentage yield, early withdrawal fees, and minimum deposit are just the beginning. 

Investing in your future is a wise decision that should start sooner rather than later. You’re never too old or too young to start planning for a financially secure life. Discover the facts about CD APY, money markets, savings accounts, and more to help you make informed decisions. You’ll be glad you did when your investments are making you money.

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Saving Money: CD, Money Market, or Savings Account?

Let’s look at multiple types of savings accounts. You have options to choose from when it comes to saving your money. First up is a money market account. This type of savings account allows you to earn interest while you have access to your money. You’ll have liquid assets where you’re allowed to write checks or make a withdrawal without facing fines. The interest rates on a money market deposit account are higher than that of a typical savings account.  

With a regular savings account, you’re not going to earn as much as other deposit accounts. The rates you receive on savings accounts are much lower than the money market or the CD options you have available. 

Taking a closer look at CD accounts and APY rates can help you determine which of the three is the best option for your long-term financial goals.

What is a CD? 

A CD is a certificate of deposit. CDs are a low risk when it comes to investing your money. The main idea you need to remember is that a CD is held for a fixed term. For example, when you put money into a checking account, it is fluid. You withdraw and add to it as much as you need to. However, with the certificate of deposit accounts, you cannot do that. You deposit your minimum opening deposit, and it stays there for a specific term. The term varies and lasts anywhere from a few weeks or months up to five years.

What Does APY Mean as it Applies to a CD?

APY stands for annual percentage yield. This means the rate that the bank or credit union pays to you. For example, you may find a CD with an APY of 2.0%. That is the rate that’s paid to you on the amount you have in that deposit account. In other words, a balance of $100 is going to earn you $2.00 in interest over the year. 

Remember that the interest paid on deposit accounts like these deposits each month or each quarter. So, the amount you see deposited will not be the full 2.0% at once. It would be in smaller increments.

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Is APY Different from APR?

Yes. APY, as mentioned above, is the annual percentage yield you earn. APR, however, is the annual percentage rate. This is a percentage you pay instead of earning. The CD APY you earn is applied to your balance either daily, weekly, monthly, or yearly. When you earn interest on your interest, that is called compounding interest. 

The compounding interest is vital to know when it comes to items such as credit cards. They typically compound interest on balances every day. Compounding interest in this aspect means you’re paying a higher balance every day. When it is for a CD, you’re growing money in your account. 

How is APY Calculated on a CD Account?

Let’s take this example from Ally Bank. According to this information, they are providing a CD APY rate of 2.3%. This rate gives you a 2.3% interest on the balance you have in your CD. So, multiply your deposit amount by this percentage, and that is the interest you’ll earn throughout the year. However, as mentioned above, the interest is typically deposited on a weekly or monthly basis. The amount you see deposited wouldn’t be the full 2.3% at once. You can take 2.3% and divide that by 12 months to get a better understanding of the rate. 

It seems quite confusing at times when you start hearing all of these terms, but it doesn’t have to be. Take time to research the rates available to you, and you’ll find that there are some fantastic ones out there. Then do the math above, and you’ll get a better idea of what your deposit accounts are doing for you.

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Does the APY Change Throughout the CD Term?

When you open a CD, you’ll find the APY is typically locked in during the term. That means a fixed rate is what you can expect throughout the life of the CD product you choose. For instance, you select a term of one year and a rate of 1.5%. The rate of 1.5% is secure for the entire year in which your money is sitting in your account. It isn’t subject to change in most instances. 

What APY Should You Consider?

The higher the APY, the more you’re going to earn. Rates right now have been as high as 2.5% in some cases and as low as .9% in others. The terms of the CD and amount you deposit determine the actual rate you will receive.


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What Does it Mean if I Have a Fixed or Variable Rate?

Two terms you should understand about CD options include fixed and variable rates. A fixed-rate has both a fixed term and a fixed APY that you’ll earn over the life of the CD. Whatever terms you start your CD with, those are the terms you’ll keep for the life of the account. 

With a variable rate, you do not have a fixed term but a rate that can fluctuate throughout the life of the deposit product. The financial institution you work with is the one that sets how the rate will vary. A variable-rate product is good if the rates are low when you’re opening the account up at the beginning. If rates seem to be headed higher in the months to come, this is a lucrative option for you to choose.

How Much Cash Do You Need to Open a CD?

The bank or credit union you work with sets the cash amounts for your minimum opening deposit. This will be dependent upon the term of the CD, the APY, and other criteria. Some banks do not have minimums, but most start at around $500 for the lowest.

Can You Lose Money When Investing in CDs?

While CD accounts are minimal risk, there are ways you can lose money. The primary way to lose instead of earning is with early withdrawal penalties. The main job of a CD is to earn you interest while your money sits. However, if you take it out early, you’re not earning. Most banks have penalties that you’ll deal with if you draw out the money before the account matures. Another way you might lose money is if the rates decline. You’re still earning on your investment, but not as much as you once did.

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What if You Need Money from Your CD Account?

The best thing to do is to have multiple accounts for your savings. If you need money from your CD before the term ends, you’re going to end up paying substantial penalties, possibly. It is best to avoid taking out any money until the maturity date is up. Then you can adjust the money deposited into this type of account if you need to. 

The wise option is to have multiple accounts such as a CD and a money market or savings account, so you have easy access should the need arise.

How Much Will You Earn on a CD versus a Money Market?

Earnings are going to typically be higher with a CD rather than with a money market deposit account. The money market accounts have multiple benefits but will ultimately have lower APY rates than the CD account options will provide. You may find a money market of around 1.85% where a CD could be around 2.5%. If you’re looking for a higher interest rate, then the CD is the way to go.

What Savings Account Offers the Best Benefits?

There are a few things to consider in determining which savings account type offers the best benefits. Ask yourself these questions:

  • Do I need access to my money at all times, or am I okay with it sitting in an account for an extended period?
  • Am I looking to save for the long haul, or do I want to save for a quick turnaround?
  • What type of retirement plans do I already have in place? 
  • Is my emergency fund built up in case of accidents, repairs, or medical needs?
  • Will I need to pay for college or schooling soon?

All of these questions are just the beginning when it comes to determining the most beneficial savings account. Money markets will give you limited access while earning interest. Savings accounts offer some interest, lower opening balances, but will not grow as fast. CD accounts tie up your money while earning more interest than any of the others. 


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Should You Go with a Credit Union, Bank, or Online Bank?

Deciding on a credit union, online bank, or big physical bank is difficult. Each of them has its own set of benefits and downsides. 

Credit Union

Choosing a credit union typically means you’re going to get a better rate than a bank. This is because they are non-profit institutions. They may offer more product options that can earn you money while you’re banking with them. However, credit unions typically require you to meet some criteria to bank there. The requirements could pertain to your military status, the job you work, or they could require a family member to bank there already. 

Online Banks

The new trend in banking is with online-only banking institutions. That means they simply do everything through the internet. You may have an app on your phone or work on your laptop or computer. Everything transacts electronically, and you do not have access to a physical site to visit. While the online services are outstanding, some people still want that personal touch of walking into the brick and mortar location. Customer service access is limited to phone calls or online chat. If you want to talk to someone in person, you may prefer a different banking option.

Big Banks

These financial institutions are for-profit. The rates are going to be lower, and you may pay higher fees for their services. However, these institutions will have more physical access than credit unions or online banks will. They also provide FDIC insurance on their clients’ money, whereas credit unions do not have that particular protection. Credit unions offer protection through a different organization.

You must consider what you’re looking for when it comes to choosing a credit union, online bank, or brick and mortar location. Are you looking for a wide number of ATMs and easy locations to find? Then a brick and mortar bank is what you’re after. Do you prefer a more personal touch with higher rates? Then a credit union is for you. However, if you want the latest technology in banking sites available, you’re going to love online banking.

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Are Jumbo CDs and Regular CDs a Good Investment? Which are Best? 

Whether you choose a jumbo CD or a regular one will depend on your deposit amount. A jumbo CD is going to require a much larger deposit than your typical term CD accounts will. The deposit for a jumbo typically starts at $100,000. 

A jumbo CD is a great way to earn money on a large amount of cash while you’re getting ready to invest in real estate, business, or other long-term goals. The terms can be as short as 30 days and up to five years. It will all depend on how long you want to tie up your money. 

Both deposit accounts are sound investments. You do not have to worry about losing money as you do with the stock market. Investing in a CD is very low-risk. You can rest assured that your money is safe as it is insured, and you’re not at risk of losing income. If you choose a fixed rate, you know that your money is going to earn that same APY throughout the life of the account.

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What Happens When the CD Is Mature?

Once the account reaches the maturity date, you must decide what to do with your money. Either you can roll the money into another CD similar to the one you had, or you can choose another route. Some people choose to use their money for other accounts, or they take it out and use it for a purchase or a trip. You need to be aware that typically, you’ll have seven days to do something with the account. Otherwise, your banking institution will roll it into the CD as it was, and you’ll be tied down again. 

What questions do you have about CDs, APY, and APR after reading this? Have you ever had a CD? Tell us about your experiences in the comments below.

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