Banking is a sometimes mysterious industry with its language. Whether you’re getting a mortgage, applying for a credit card, or locking in an interest rate for your savings account, it helps to understand the terms and conditions being discussed. Banking experts like Dan Schatt agree that everyone should know and understand the following terms:
This acronym stands for Annual Percentage Yield — it’s the amount of money you can expect to earn annually by keeping your money in a bank. Unlike interest (typically reserved for loans), APY includes all fees and other charges that may be deducted from the account each year. So when comparing banks, make sure to compare their APY rates separately from their interest rates.
2) Compound Interest
Compounding is the act of reinvesting your interest earnings back into the principal of your investment. This means that, over time, the interest you accumulate on deposits will earn more money than an account with a lower APY.
A dividend is money paid to account holders who own stocks in companies or mutual funds. It’s rare for banks to pay dividends on their accounts.
The acronym stands for the Federal Deposit Insurance Company, an independent agency of the United States government that insures bank deposits. All major U.S. banks are members of the FDIC, but some states have insurance funds that provide additional protection for depositors.
The acronym stands for a type of savings account used to maintain retirement funds. For example, anyone who works for a company with an established 401(k) plan can create a traditional IRA, which allows them to defer paying taxes on their money until they withdraw it upon retirement. There are several types of IRA accounts — Traditional, Roth, SEP, and SIMPLE IRAs.
Most savings accounts have a date on which the deposited money will “mature” or become available to you for withdrawal. This time frame is typically 90 days but can also be six months or one year. Just make sure to avoid withdrawing your funds before they mature unless you want to pay the penalty.
CDs and other certificates of deposit work the same way as savings accounts, but they offer higher interest rates because your money is locked up for a specific amount of time. Most CD terms range from six months to five years before the money becomes available for withdrawal. The longer you agree to keep your money in the bank, the more interest you’ll accrue.
Banks typically charge a penalty for withdrawing money from your account before it becomes available (usually after 90 days). These fees vary — some banks charge as much as six months of interest on an amount that’s been withdrawn early, and others don’t charge any fee at all. Once you agree to a CD term, your money is locked in for the duration of the term. That said, most banks will allow you to withdraw up to 10 percent without penalty before your maturity date.