The Benefits of Certificates of Deposit

Long-Term Investing with Certificates of Deposit

Long-term investing in Certificates of Deposit ("CD") can be quite rewarding! Investments are not only a way to earn additional income, but also combat inflation. Assuming that inflation is occurring with every year that passes, money under your mattress actually loses value. Inflation is monitored by the Bureau of Labor Statistics, and is quickly defined as the level of which prices for goods and services is rising - and consequently - purchasing power of one single dollar is decreasing. If you were to invest that same money in a CD, for example, you'd have a better chance at beating inflation.

While some individuals may rely on interest for income (and withdraw or use the interest), long term investing is most effective when interest is re-deposited to potentially gain even more interest. Consider this classical example: You're going to have a child and wish to set aside a fund that will be available to them when they turn 18 years old for college, a car, down-payment, head-start, etc. You can afford to invest $100 each month, or $1,200 per year. If you were to simply save that money, you'd have $21,600 to give your child when they turned 18. Investing in 1-Year CD's over 18 years, however, you might have $44,675 - more than DOUBLE - due to interest! Here is the disclaimer: No one knows how markets will behave 18 years into the future, so this is a simple projection based on how rates have behaved historically and might behave again.

Safety & Stability

Unlike the stock market, CD's are guaranteed and will not lose face value if allowed to mature. Luana Savings Bank is insured by the FDIC, a government corporation, which covers CDs and many of our other accounts up to certain dollar limits - automatically. Always ask our staff about FDIC insurance before making a deposit so you understand any potential limitations.

A particular market investment in good years traditionally experiences higher yields than a CD. Retirement fund investment companies have been found to advise younger individuals to invest more risky (in stocks/markets vs a CD) because if they do experience losses, younger individuals have more time to recover from those losses. Take this into consideration, however: If you have an initial investment of $1,000 and it loses 10%, you're left with $900. Too many individuals falsely believe to make up the loss they need to only gain 10%...but 10% of $900 is only $90 and you're still short $10. A 10% devaluation requires an 11.1% gain to return to the initial valuation; a 20% loss requires a 25% gain to return to pre-loss levels, and so on. Viewed another way, if a market investment loses a particular value over the course of 9 months then gains that same value back during the next 15 months, 2 years will have passed yet there have been zero net gains on that investment. CD's eliminate this risk as they continually accrue interest with time, so long as they adhere to FDIC insurance coverage rules.

How CD's Work

A Certificate of Deposit is a time/term deposit, meaning that when you transfer funds into a CD account, those funds become unavailable until the CD reaches its term - also known as maturity. If a CD has a term of 36-months, for instance, funds in that CD become unavailable for 36 months, earning interest that entire time, however. If the initial deposit is $1,000 into a 36-month term, and the rate is 1.00% APY, at the end of the first year that CD has earned $10. At the beginning of the second year, however, the balance has become $1,010 due to interest, and interest earned at the end of the second year increase to $10.10, etc. The larger the initial deposit and the better the rate and term, the more money you'll earn!

You'll receive notification before a CD matures and generally have up to 10 days after the maturation date to act on the funds in that CD. You could withdraw both the initial deposit and interest, or alternatively consider leaving the initial deposit and earnings to continue to earn more interest at the then-current interest rate for an additional term. If you wish to withdrawal any of your deposit before the CD matures, you may forfeit any interest earned and may also be penalized further against your deposit. A CD should generally be a well planned medium- to long-term investment.

Some CDs may allow you to 'bump up' or 'add on'. If a CD allows one bump-up during its term, for example, that means if interest rates increase, you can notify the bank once during the term of your CD to 'bump up' your interest rate to the then-current rate. An add-on allows you to deposit additional funds at some point(s) during the term of the CD at the original or another pre-determined interest rate.

Visit our Certificate of Deposit page to view our current rates and to project earnings with just a few clicks!