Banking Basics and Securing the Best CD Interest Rates
Having a thorough understanding of banking basics is the key to making your money work for you. Earning money is only half the game plan, the other half is budgeting and saving. A bank savings account or certificate of deposit is one of the safest places to save your money since the government (FDIC) insures bank deposits up to $250,000 per depositor, per account. The insured amount used to be $100,000 but was temporarily increased due to the financial crisis of 2008. Sooner after the new $250,000 limit was made permanent.
There are many types of bank accounts to choose from, certificates of deposit, savings account, money market accounts and checking accounts are the four main types. There are also variations of the four main account types. Certificates of deposit and savings accounts are designed to save money.Money market accounts are used as a temporary place for cash and checking accounts are transactional accounts, used to write checks, pay bills electronically and use a ATM debt card for purchases.
The type of bank account you choose will depend on your needs. The rate of interest you earn on the account also depends on the account. The highest interest rates are usually on certificates of deposit, these rates are known as CD rates. You can find the best CD rates by searching online and rates vary greatly by bank.
Longer term certificates of deposit have higher CD rates and shorter term certificates of deposit have lower CD rates. That is usually the case except when the rate curve is inverted, shorter term rates are higher than longer term rates. This usually happens when inflation is very high and the Federal Reserve increases short term rates to cool the economy.
Checking accounts usually have the lowest interest rates. Many banks don't even offer rates on checking accounts and if you don't have a certain minimum balance in the account you might also pay a monthly fee. The minimum balance requirement also varies between banks, the minimum can be anyway from $500, $5,000 or $10,000.
Since bank accounts are generally risk free, the interest you earn on the account will be lower than other types of investments such as stocks, bonds and mutual funds. CD rates at banks, savings rates and all deposit rates are indirectly tied to the rate of inflation - the higher the inflation rate, the higher prevailing account interest rate.
Back in the 1970's and early 1980's bank CD rates and savings account rates were as high as 12 percent since the inflation rate was just as high. These days the best CD rates on 1 year certificates of deposit are just above 1.00 percent and the best savings rates are at 1.00 percent. When you factor in the inflation rate of 1.7 percent (CPI) the account isn't even keeping up with the pace of inflation. A return that isn't even keeping up with the rate of inflation will diminish your purchasing power.
The interest rate is the biggest factor when you calculate earnings on the account but all interest rates are not equal. The frequency of when the interest rate is paid determines the annual percentage yield (APY) on the account. The more frequently interest is paid, the higher the account's APY will be. When interest is paid on the account differs by account and bank - the frequency can be daily, weekly, monthly, quarterly or annually.
Online banks offer the highest CD rates and highest savings account rates so it pays to bank online. There are also many conveniences to searching for rates and opening an account online. You need to take the time to find the best rates and lowest fee accounts which is a lot easier these days. Before online banking you had to search for the best deals by physically going from bank to bank which most people didn't do so they didn't get the best deals.
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