Banks offer higher interest rates for certificate of deposit accounts (CDs) than they do for traditional savings accounts because the customer is agreeing to park their money at the bank for a set period of time. During this time period, the bank can lend out the money in the form of loans that earn fees for the bank, allowing them to provide a portion of the amount earned to account holders in the form of interest. When the money is withdrawn from the account early, the bank has less money available to lend out and loses the ability to earn money on the funds. This is why you are charged a penalty fee when you withdraw money from a CD early.
It is important to leave the money in the CD for the entire term if you do not want to suffer significant losses. The primary reason that many people invest in CDs is to have a safe, interest bearing option for storing their money so they do not have to worry potentially losing part of their money. Paying a considerable penalty for withdrawing money from a CD early goes against the entire reason for investing in a CD at all.
What Is The Penalty?
Banks are allowed to set their own fees when it comes to early withdrawals from CDs held at their institutions, so the fees charged can vary widely from bank to bank. The penalty at one bank could be as little as 6 months’ worth of interest, or about $18.48 for a $10,000 withdrawal at today’s national average yield of 0.37 percent. The penalty at another could be as much as 4 percent of the amount withdrawn, for a total of $400. Make sure that you read all of the terms associated with the CD before depositing your money so you know how an early withdrawal penalty will be assessed and how much it will be.
When you withdraw money from a CD early, you will not just lose the interest that you would have earned. You could also face significant fines that could reduce the amount of your principal. Many banking institutions have rules in place that will allow them to confiscate a portion of the principal deposited if the account holder withdraws money from the account early. A portion of the principal is generally confiscated as part of the penalty fee when there is not enough accrued interest in the account to cover the charge. Credit unions typically operate in a similar fashion.
It is important to consider the cost angle when deciding whether to pull money out of a CD before it has matured. Use a calculator to calculate the financial impact that the early withdrawal penalty will have on your funds. Many experts expect these fees to rise even further in the future when interest rates begin to increase.
Many people are frustrated with the way that the largest banks seem to be nickel and diming their accounts with added fees, additional charges, and low interest rates for savings. A number of these frustrated customers are considering switching to a credit union because they have heard that the credit unions have lower fees and better rates for loans and other credit products. Others are reluctant to make the switch because they believe that banking at a credit union will be more difficult or less convenient. While switching to a credit union is not for everyone, some will find that the advantages outweigh the disadvantages. Here are some things to think about before making a decision on switching to a credit union.
Eligibility Requirements To Join
Because credit unions are designed to serve a particular community or group, there are some eligibility requirements that must be met to join a specific credit union. In some cases, the eligibility requirements are as simple as living in a particular area or working in a particular industry. In other cases, all of the members of a specific credit union are also alumni of a certain university, members of a religious institution, or are part of a particular profession.
Before making a decision on switching to a credit union, research the different credit unions in your area and determine if you meet the eligibility requirements for any of them. The free website CreditUnionLookup.com lets consumers who are interested in joining a credit union search for credit unions based on location, the name of the institution or a particular affiliation like a profession or employer.
Branches And Automatic Teller Machines
Credit unions have fewer locations than banks, leaving you fewer places to do in-person transactions. However, many credit unions also belong to shared banking networks that allow the customers of each credit union to use the ATMs of all of the other member credit unions without incurring out-of-network fees. In some cases, members can also perform other banking services through the other credit unions in the network. You may also be able to access your credit union account online, giving you many options for doing your regular financial tasks.
Many banking customers stay with their bank because of the rewards that they are a earning for keeping their account with that particular institution, such as cash back rewards, airline miles, and travel discounts. Many people do not know that some credit unions offer these types of account perks as well. The transactions that are made on your debit card or credit card from a credit union will earn points or cash back just the same if you sign up for the appropriate programs. Credit unions that do not offer these perks generally have even lower fees and higher interest rates for savings accounts, giving their members a benefit for doing business with them.
If you are a homeowner that wants to access the equity in your home, there are several choices available to you.
The three main choices available are to take out a home equity loan, a home equity line of credit, or a cash-out refinance. Each of these choices for accessing the equity in your home has distinct advantages and disadvantages that must be considered when making your choice.
You must also take into consideration how much equity is available in the home, how much money you need to borrow for your current situation, the interest rate of your current mortgage, and when you are planning to repay the money borrowed.
Here is some information that may help you make your decision.
Home Equity Loan
Also known as second mortgages, home equity loans allow you to borrow a set amount of the equity in your home to be repaid within a certain amount of time at an interest rate that could be fixed or variable. Home equity loans are a lot less common today than they were before the housing crash, but a number of banks still offer them to homeowners that are interested in them. If you choose this method, make sure to compare the interest rates of several different lenders as you may be able to get a better deal than the first offer you find.
Home Equity Line Of Credit
Another common method of accessing the equity in a home is taking out a home equity line of credit. This line of credit is secured by your home and allows you to take out funds, up to a maximum amount, over a set period, typically called the draw period and lasting for 10 years. During the draw period, a minimum amount based on an adjustable interest rate must be paid each month towards the loan. After the draw period has ended, any amount outstanding must be repaid over another set term, usually 15 years. The interest rate for this repayment period could be fixed or variable, depending on the terms of your particular home equity line of credit.
With a cash out refinance, the homeowner refinances their primary mortgage for up to 80% of the home’s value and keeps the difference in cash that can be used for any purpose the homeowner desires. You are still paying a single loan, but the interest rate or length of time for repayment may have changed. Many of the homeowners that choose a cash-out refinance often want to refinance for other reasons, such as getting a better interest rate or lowering their payments, and obtaining cash at the same time is convenient. When choosing this option, it is important to compare the interest rate, fees, and closing costs of the new loan to make sure you are not paying more than you should to refinance.
What ways have you accessed equity in your home?
Inflation is a concern for every investor. To accumulate money over the long term, the returns from your investments have to beat the pace of inflation, which reduces the buying power of your money.
Because of the current volatility in the markets, some investors are seeking out low risk investments to keep their money safe, but these generally have low rates of return will not outpace inflation. As the cost of living continues to rise, investors need investment strategies that will help them compensate for the effects of inflation.
Here are some good investment strategies that you can use.
Focus On The Balance Between Risk And Reward
People are increasing their focus on safer investments because they are fearful that dramatic market swings will cause them irreplaceable losses. Unfortunately, there is really no way to get a rate of return that outpaces inflation without taking on some sort of financial risk.
The trick is to balance the amount of risk you are willing to take against the rate of return you are hoping to earn. Investors that are nearing retirement age should be assuming little risk to ensure that their money is there for them during their retirement years. Younger investors can assume more risk in their investment strategies to increase the chances that their portfolio returns will outpace inflation over the long term.
Consider Investing In Treasury Inflation-Protected Securities
Investing in Treasury Inflation-Protected Securities is one of the best investment strategies if you are worried about the effects of inflation on your future finances.
Treasury Inflation-Protected Securities are Treasury bonds that have rates of return that rise along with the rate of inflation. This means that if inflation increases, the rate of return on the Treasury bond increases as well. The bonds are issued in five-, 10- and 20-year terms and pay interest twice a year. These bonds are considered very safe because they are backed by and can be purchased directly from the government.
Dedicate A Portion Of Your Portfolio To Stocks
Over the long term, the stock market is the only investment vehicle that consistently delivers returns above inflation. This is a good reason to dedicate a small portion of your investment portfolio to stocks instead of shunning them altogether.
By keeping some of your money in stocks and the rest in low-yielding, safer investments, you increase your chances of earning an attractive rate of return that outpaces inflation without putting the bulk of your savings at risk.