I have always preferred keeping my savings in a bank account rather than hiding it under a shoebox under the bed. It feels safer and I enjoy earning interest on my money. However, recently, I came to learn the hard way that what I think is the interest I earn in a savings account may not be what I end up with. Let me narrate my experience and how I landed on choosing Certificate of Deposit (CD) for safeguarding my interest rate.
A while back, I noticed that the interest payment on my savings was less than expected. After doing some research, I found out that without any notice, my bank had reduced its Annual Percentage Yield (APY) from 4.35% to 4.25%. The drop was not big – just ten dollars less per year on a ten thousand dollar balance – but this wasn’t the point at all. The point was that they had silently decreased my APR and they did not tell me anything about it.
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Through this event of mine, I realized how easy it is for banks to change your APY without letting you know about it. It is frustrating to believe you are earning certain interests only to realize later the rate has dropped instead. Because of these changes being made when am not logging in every day into the account, until the next interest payment arrives its easy for me not to identify these changes until then.
There was a need for me to guarantee that the interest rate on my savings would stay constant. This is what made me consider certificates of deposit (CDs). A CD allows you to fix an interest rate over a particular period, say 12 months. For instance, if I were to open a $10,000 CD with an APY of 5.00%, I’m going to earn 5.00% for a whole year without any doubt whatsoever. That implies that no matter how much the market rates fluctuate, I can at least expect to get $500 in interest.
This is a great moment to secure high rates by using CDs because the Federal Reserve has been hinting towards cutting interest rates later this year. If I left my money in a regular savings account till end year it might have accumulated very little interests compared to now. The Federal Reserve’s action on federal funds rate directly impacts savings accounts and CDs rates meaning anticipating their moves can be profitable.
However, there's one downside about CDs; when you put your money into them you agree not touch it until maturity date lapses. This usually involves penalties which are associated with withdrawing the money early such as expensive charges. Therefore, I had to ensure that everything that I put into a CD was money that would not be needed before the term expired and this took some careful planning but in my opinion having the guarantee of fixed interest made it worthwhile.
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The switch made to CDs has given me peace of mind. I don’t have to worry about sudden drops in APYs on my savings account anymore. This makes it easier for me to plan better and know the exact amount of interest I will earn, which gives me a sense of stability that I really appreciate.
If you want your savings’ interests rates guaranteed, open a CD. They are currently among the highest we’ve had in years and it’s a great way to hedge against possible rate cuts. Just make sure you do not touch the money during that term otherwise you may have penalties. That was when it became apparent that staying with this type of savings would cause them to increase steadily in the long run with no unpleasant surprises.