How Early Withdrawal Penalties Are Charged

You’ll be charged an early withdrawal penalty if you withdraw your money from the CD before it matures. For example, if you purchased a 60-month CD and withdraw your money after 48 months, you’ll have to pay a penalty because you didn’t leave your money there for the entire 60 months.

You can be charged an early withdrawal fee even after the CD has matured if you don’t withdraw the money before it’s reinvested. When a CD matures, you have a certain period of time, e.g. 15 days, to withdraw the money or reinvest the CD. Many CDs will automatically renew if you don’t respond. If your CD renews and you need the money, you’ll have to pay the early withdrawal penalty.

How Much is the Early Withdrawal Penalty

CD early withdrawal penalties vary from bank to bank and even by each CD product. Early withdrawal penalties require you to forfeit a certain amount of interest and may even charge a fee on top of the interest forfeited. For example, a 12-month CD may have an early withdrawal penalty of 3 months interest. Or, it could also charge $10 plus 3 months interest. Longer-term CD products often have higher early withdrawal fees. You might forfeit only a percentage of the interest you’ve earned.

If you withdraw your money from a CD too early, you might end up earning absolutely nothing on the deposit. Or worse, you might lose some of the principle you deposited. For example, let’s say you deposit $1,000 in a 13-month CD at 3% APY and a 6-months-interest early withdrawal penalty. If you withdraw your money at eight months, you would only earn six months of interest. If you withdraw your money at four months, you would not only forfeit all the interest you earned, but the other two months of interest would be taken from your original deposit.

Can You Avoid the Penalty?

There are CDs that don’t have early withdrawal penalties, but these CDs have lower interest rates. In fact, the interest rate on a no-penalty CD may be closer to that of a savings account offered by the same bank.

Basic/Free Checking

Basic checking accounts don’t have any frills of fringe benefits. These accounts let you do the basic transactions: deposit money, write checks, and use a debit/check card. Many basic checking accounts are free, but some banks charge a small monthly fee for these basic checking accounts. You may be able to have the fee waived by maintaining a certain minimum balance or by depositing a certain amount of money each month.

Premier Checking

Banks may offer several different tiers of premier checking accounts. These accounts have features beyond the basic and free checking accounts. For example, premier checking accounts often pay interest in the balance. They may offer free checks, free cashiers checks, and discounted or free safe deposit boxes. You may be given a lower interest rate on loan products from the same bank or a higher interest rate on CDs. Premier checking accounts typically have a monthly or annual fee that can be waived if you deposit a certain amount in your account each month or if you maintain a certain minimum balance.

Joint Checking

A joint checking account is an account that shared by at least two people. With a joint checking account, both people have access to the money in the account. The features of a joint checking account might mimic those of either a basic or premier checking account so it’s a good idea to read the disclosure and fees associated with the account.

Student Checking

Checking accounts for students are usually free and often combine some of the features of both basic and premier checking accounts. For example, the student may get the added benefit of free checks, no fees, or free cashiers checks. The student may also enjoy a lower interest rate on credit cards or loans from the same bank.

Second Chance Checking

Not many banks offer second chance checking accounts – accounts for people who’ve written bad checks and have been put into Chex Systems. These accounts may charge higher monthly fees or have limits on the number of transactions you can make each month. You’ll be in Chex Systems for 5 years, after that you’ll be bale to get a regular checking account.

It’s a good thing banks have several different types of checking accounts and savings accounts. That way, you can sign up for an account that meets your needs.

Compare Interest Rates

Traditional brick-and-mortar banks usually offer very low interest rates on savings accounts. Interest rates so low that even a deposit of several thousand dollars only earns a few dollars of interest a year. If you want to earn a more competitive interest rate on your savings, you’ll have to take a look at high yield savings accounts from online banks. These banks are known for offering more competitive interest rates on savings accounts.

Look for an Account With No or Low Fees

The money you pay in savings account fees could be earning interest. Though it’s just a small amount, every little bit counts when you’re trying to earn interest on your savings accounts. There are plenty of savings accounts with good interest rates, that don’t charge a monthly or annual account fee.

Don’t Touch the Money

You’ll earn more interest on your savings if you just leave the money in your account untouched. Because of the beauty of compounding interest, the interest you earn on your balance will also earn interest, giving you the ability to earn more money than an account that charges simple interest. When you’re shopping for a savings account, make sure you choose one that calculates compounding interest.

Build Your Balance

Making regular contributions to your savings account will help you build a bigger balance and earn more interest. You can set up an automatic transfer from your checking account that falls in line with your weekly, bi-weekly, or monthly payday. Having the money transferred automatically removes the extra step that keeps many people from saving money.

If you’re saving up for a big expense, like your annual tax bill or semi-annual insurance payment, put the money in your savings account rather than letting it accumulate in your checking account. Since you won’t need the money for several months, it will have an opportunity to earn interest before you need to spend it.

Deposit the cash rewards you earn from a rewards credit card or rewards checking account. Normally, you’d be inclined to spend this money, but instead, reward yourself, by putting it in savings and letting it earn interest.

No Bank Branches to Visit

If you prefer to talk to a bank teller in person, then a traditional savings account is a better option for you. With an online account, you’ll only be able to talk to customer service over the phone, where you’re more likely to encounter rude customer service representatives.

Depositing Money

If you need to deposit money in a traditional savings account, you can simply drop by the bank with your deposit. Most banks have a drop box where you can put deposits after hours. Traditional banks also let you transfer money electronically.

It’s not always so easy to deposit money in an online savings account. Your options are to make an online transfer or mail your deposit. That means you’ll have to wait several ways before your deposit is available. It will be much longer if you have to mail a check because not only do you have to wait for the check to reach the bank, you have to wait for check to clear before the money is in your account. It’s not a huge deal since you probably won’t need to access the money for awhile, but that’s less time for your deposit to earn interest.

Withdrawing Money

Getting money out of an online savings account could be harder, since you can’t go to a bank branch to withdraw money. Instead, you’ll have to use a bank transfer or withdraw money from an ATM, if your bank gives you an ATM card. You’ll probably have to pay a fee to withdraw money using an ATM card, from the bank whose ATM you’re using, from your bank, or possibly from both.

If your savings account is at a local bank, you can visit the branch in person to withdraw money or use your ATM card, if you have one, at one the bank’s local branches.

Which is Better?

Sure, online accounts pay better interest, but when it comes to depositing and withdrawing money, there are some drawbacks. But, if you rarely visit a bank branch now because most of your transactions are electronic, then having an online account won’t hurt. And, there’s no reason you can’t have both an online an a traditional savings account if you need to.

However, you may not feel comfortable having your money tied up for so long. Creating a CD ladder lets you invest in the higher rate CD, but you only have part of your money invested so you still have some degree of liquidity.

How a CD Ladder Works

You invest in several CDs each with different terms, so the maturity dates are staggered. When the shortest-term CD matures, then you’ll reinvest that money in the longest-term CD as long as you don’t need the money. Then, after another term you’ll have another CD maturing and you’ll repeat.

CD Ladder Examples

Say you have $4,000 to invest and you want to build up to a 12-month CD. You can create a 12-month CD ladder. You would invest $1,000 in a 3-month CD, another $1,000 in a 6-month CD, $1,000 in a 9-month CD, and the final $1,000 in a 12-month CD.

In three months, the first CD will mature. You can keep the money if you need it or you can continue your ladder by reinvesting money in a 12-month CD. In three more months, your 6-month CD will mature. Again, invest that money in a 12-month CD. Every three months, a CD will mature and you’ll reinvest in a 12-month CD. At the end of the year, your money will be invested in 4 12-month CDs that mature every three months.

You can do the same thing with five year CDs, which typically have a higher interest rate. You would invest your money in five CDs – 1-year, 2-year, 3-year, 4-year, and 5 year CDs. Each year a CD will mature and you’ll reinvest the money into a 5-year CD. After the 4^th year, all your money will be invested in 5-year CDs at the highest available interest rate.

Benefits of a CD Ladder

A CD ladder makes it easy to invest your money in longer term CDs, without giving up access to your funds all at one time. It also lets you take advantage of CD rate increases. Once you lock-in a CD rate, you can’t invest in a higher rate CD without coming up with extra funds or paying the early withdrawal fee. But, if you have your CD terms staggered, you can lock-in the new rate when one of your CDs matures.

You don’t have to worry about losing money by creating a CD ladder as long as you invest in CDs from an FDIC- or NCUA-insured bank or credit union.

It would be an added bonus to earn interest on the balance you keep in your checking account. But it’s not as easy to earn interest on a checking account as with other types of bank accounts.

Checking Account Interest Rates

Interest rates on checking accounts are typically the lowest of all interest rates offered by banks. It’s not odd to see a checking account rate as low as .05% or even .01%. Yes, that’s a fraction of a percent. On a $1,000 balance at .05%, you would earn just five cents interest in a year.

Not all banks have such low interest rates on checking accounts. Some online banks have higher checking account rates, but rarely are checking account rates as high as CD rates. Banks that do offer high checking account rates may have high minimum balance requirements or other requirements to get earn the highest interest rate.

Minimum Balance or Monthly Fee

Many interest-bearing checking accounts also charge a monthly or annual fee. There’s a huge drawback to paying this fee. Unless you have a great interest rate, a high balance, or both, checking account fees will consume the interest you earn.

Some banks will waive fees on checking accounts, but you have to meet a certain requirement. Often you’ll have to maintain a certain balance on the account. The balance could be as low as $1,000 or as much as $100,000 depending on the bank and the account. (Note: The minimum balance to avoid the monthly fee may be different and higher than the minimum balance to open the account.) Some banks may let you avoid the fee by receiving at least one direct deposit to your account each month.

Highest Rate Requirements

Besides carrying a minimum balance or having direct deposit, the bank may have other requirements for you to earn interest on your balance. For example, you may have to make a certain number of debit card transactions, receive electronic statements, or set up an automatic debit from your account. If you don’t meet all the bank’s requirements in a particular month, your balance may earn a significantly lower interest rate.

It’s All in the Details

If you sign up for an interest-bearing checking account, make sure you read the disclosures to learn what interest rate you’ll receive and what you have to do to earn that interest rate. Be wary of minimum balance requirements that you can’t afford. You may be able to some money in a high-interest rate savings account or CD to earn more interest.

Fees

Checking accounts often have monthly or annual fees. The checking accounts with these fees may have more options and conveniences than free checking accounts. Free checking accounts are often very basic with little or no extra frills. Some checking accounts require you to maintain a certain average daily or monthly balance to avoid the fee. You may also be able to avoid the fee by making a certain number of debit transactions each month, by having at least one direct deposit, or by setting up a direct debit from your account.

Online Access

The ability to access your account online is critical these days. Not only can you check your account balance online, you can also review transactions and pay your bills directly from your computer. Some banks even have apps that can be used on s smartphone like an iPhone or Android device.

Location of ATMs/ATM Fees

If you ever need to pull cash from your account, having your bank’s ATM nearby is important. You’ll be charged an ATM fee for using an out of network ATM. In that case, both the foreign bank and your own bank could charge you a fee, though some checking accounts waive or refund fees for using another bank’s ATM. Most often, the banks that don’t have a lot of ATMs that will waive or refund a certain amount of ATM fees from out of network bank.

Interest Rate

The most basic, free checking accounts seldom pay interest on your balance. Typically, the types of checking accounts that pay interest on the balance also charge a monthly or annual fee. But these fees and often be waived by maintaining a certain minimum balance. Many checking accounts, that do pay interest, have tiered interest rate schedule where low balances earn at a low interest rate and high balances have a high interest rate.

Transaction-Based Fees

Watch out for banks that charge fees on debit card transactions (those made using your check card and a PIN) or checks. For example, your bank may charge a $.25 fee for each debit transaction you make using your PIN or for each check you write.

Overdraft Protection

If you bounce a lot of checks – never a good thing – you should choose a bank that offers overdraft protection. You may be able to link your checking account to a savings account or line of credit to pay overdraft transactions. Either way, you’ll incur a fee when you don’t have enough money in your checking account to cover a transaction.

Choosing a Checking Account

The best way to pick a checking account is to think about what you need from an account and make sure the account you choose meets your needs for a low cost.

Interest Rate

The interest rate affects how much interest you earn on the money you have deposited in either the savings account or the CD. If you compare CD rates and savings accounts rates from the same bank, more often than not, you’ll see that CD rates are higher. That means you’ll earn more interest on the money you have deposited in the CD than the same amount in a savings account.

For example, assume you could deposit $1,000 in a savings account at 1% or a CD at 2%. At the end of one year, the savings account would earn $10, while the CD would earn $20. You would earn double the interest by depositing your money in the CD.

Withdrawals

Here’s where savings accounts have the advantage over CDs. When you put your money in a CD, you agree to leave the money in the CD for the specified time period. For example, if you purchase a 12-month CD, you must leave your money in the CD for 12 months or you’ll face an early withdrawal penalty which will require you to forfeit some of your interest earnings.

A savings account gives you more freedom to withdraw money when you need it. You can make up to six withdrawals each month from your savings account and you won’t have to pay an extra fee. Any withdrawals over six will incur a fee between $10 and $25 depending on the bank.

Deposit Insurance

As long as you choose a bank that’s FDIC- or NCUA-insured, your deposit in a CD or savings account are both insured up to $250,000. If the bank fails, your deposit is covered either the FDIC or the National Credit Union Association.

Which to Choose?

The major tradeoff between savings accounts and CDs is interest rate for flexibility in withdrawing money. With a CD, you earn more interest, but are penalized for premature withdrawals. With a savings account, you earn less interest, but have more freedom to withdraw your money. If you think you’ll need access to the funds, it’s probably better to deposit the money in a savings account or a short-term CD.

The interest you earn in the first year is added to the total balance and that new balance earns interest in the second year. So, you’re earning interest on money you never even contributed – your interest has compounded.

How Compound Interest Works Grows One Deposit

Say, for example, you deposit $5,000 in an account that earns 7% interest annually. In the first year, you’ll earn $350, making your total balance $5,350.

In the second year, you’ll earn $374.50 in interest, making your balance $5,724.50, even without making an additional deposit.

In the third year, your investment earns $400.72 and you’d have a balance of $6,125.22. Notice the interest earned gets higher each year. Also notice that you’ve earned an extra $1,125.22 over three years by just depositing $5,000.

If the same investment paid simple interest only on what you deposited, you’d only earn $1,050 on the investment. Still ok for three years, but after 10 years, you’d earn $6,335 more on an account with compound interest.

Retiring on Compound Interest

Compound interest comes into play when you’re investing money for retirement. If you start early, compounding interest works to your advantage. A 22-year-old who wants to accumulate $1 million by retirement would only have to invest $4,035.90 annually at 7%. That’s less than $350 per month.

However, a 32-year-old would have to invest $8,408.07 annually, or about $700 per month, to reach the same retirement goal. And a 45-year-old would need to invest $18,713.93 to have $1 million by retirement. That’s more than $1,500 per month! The longer you wait to start saving, the more money you’ll have to contribute each month to reach your retirement goal.

Compound interest is a great tool to use and works even better when you start young. Not only because there’s more time for the investment to accrue interest, but also because younger people can be more aggressive with investments. Achieving a steady 7% rate of return year after year is tough to do.

One year, the investment may earn 17% and the next it could earn only 3%. Younger investors have more time for the investment return’s highs and lows to smooth out. The closer you get to retirement age, the less volatility you can handle.

Restrictions on Transactions

Savings accounts allow you to make unlimited deposits during the month. However, you’re only allowed to make six withdrawals per month. Any extra withdrawals will incur a fee.

Banks also restrict the way you can withdraw money from a savings accounts. You can typically only withdrawal money from the bank using a withdrawal slip or make a transfer from your savings account to another account either with the same bank or another bank. There may be a fee for bank-to-bank transfers.

Interest on Savings Accounts

Savings accounts pay a small amount of interest on deposits. The APY, or annual percentage yield, on a savings account is currently between .25% and 1.25%. Online savings accounts are more likely to offer higher interest rates. $10,000 deposit earning 1.25% annually would $125 at the end of the year, assuming interest is added annually. It may not be much money, but it’s more than you’d earn if you didn’t put the money in any account at all.

Savings Account Fees

Many savings accounts are free – meaning they don’t charge a monthly or annual fee on the account. But, you can still incur a fee for certain types of transactions. For example, if you make more than 6 six withdrawals in a month, you will be charged a fee for each additional transaction. You may be charged a fee for a bank or wire transfer, for a deposit that’s returned, or for closing your account within a certain number of days within opening. Make sure you understand which fees your bank charges on savings accounts and try to avoid those activities.

Balance Requirements

Some banks may require an initial deposit to open the account. Some banks also require a minimum balance requirement to avoid having a monthly or annual fee charged. There may be a tiered interest rate system, where low balances receive a low interest rate while higher balances receive a higher interest rate. Sometimes, even the opposite is true.

Savings Account Insurance

Up to $250,000 of your balance is safe as long as the savings account FDIC-insured or NCUA-insured (for credit unions). If the bank fails, the Federal Reserve or the NCUA will cover your deposit.