Lone Star National Bank
Why You Should Open a Certificate of Deposit with Lone Star National Bank
Jan 09, 2016
Anyone looking for a place to store his or her hard-earned money for a long time (other than a checking or savings account) should consider a certificate of deposit (CD). It’s a great way to hold the cash you won’t be using for an extended period of time. In this piece, we’ll break down everything you’ll need to know about CDs and investment strategies.
What is It?
In simple terms, a CD is a low-risk investment product sold by most financial institutions. When you buy a CD, your deposit is insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. Unlike a savings account, CDs require funds to be left untouched for a specific amount of time, called a term. Terms can range from three short months to as long as five years. If you need the money before the term is up, you’ll more than likely have to pay a penalty.
Why Should I Open One?
While your money is in a CD, it starts earning interest called an annual percentage yield (APY). You’ll know the rate before you put the money into the CD. Most of the time, the rates and how much you earn will depend on the amount you’re willing to invest and the time you’re prepared to let it go. The larger the amount coupled with a longer period of time means you’ll earn more interest. Keep in mind, though, that interest you earn is considered taxable.
There are a variety of CDs to choose from, so make sure to research them thoroughly:
- Traditional CDs: These are the most straightforward and simplest of CDs. Your money is held for a fixed time period with a fixed interest rate. Leave it untouched for the term and you'll get your money back with interest. However, you’ll pay a penalty if it’s used.
- Variable-rate CDs: Traditional CDs will have a fixed interest rate, but variable rate CDs won’t. They offer rates that adjust with rate indexes, so there is risk. If rates go up, you can earn more on your deposit. If they fall, so will your earnings.
- Jumbo CDs: The name implies it all. A Jumbo CD requires a large sum for a deposit and pays a higher interest rate on return.
Laddering is a popular CD investment strategy that helps you enjoy a high interest rate while maintaining access to some of your money. It's also a great way to make a CD ladder part of your emergency fund. What you do is divide the investment into equal portions and each goes with a different term. Once the CD with the shortest term matures, you invest it again in a higher-rate, longer-term CD. If you keep this up with each CD, you’ll have one maturing every year.
Open a CD with Us!
While you won’t become a millionaire with a CD, you can still manage to get a good return of investment. If you have any questions about our CD services, call or visit our bank in McAllen today.