Certificate of Deposit

A 16-month CD (Certificate of Deposit) is a type of savings account offered by banks and credit unions. Here are the key characteristics:

• Fixed Term: It has a maturity period of nine months, during which the deposited money is locked in.
• Interest Rate: Typically offers a fixed interest rate generally higher than regular savings accounts.
• Minimum Deposit: Often requires a minimum deposit amount to open the account.
• Early Withdrawal Penalty: If you withdraw the funds before the 16-month term ends, you usually incur a penalty, a portion of the interest earned, or a specified fee.
• FDIC Insured: In the United States, CDs from credit unions are usually insured by the National Credit Union Administration (NCUA) up to $250,000 per depositor per credit union.

A 16-month CD can be a good option if you have a specific short-term savings goal and want to earn a higher interest rate without taking on much risk.

APY stands for Annual Percentage Yield. It is a measure of the total amount of interest earned on an account based on the interest rate and the frequency of compounding over a year. APY is a useful metric for comparing the annual earnings on different savings products, such as savings accounts, CDs, and money market accounts, because it standardizes the effect of compounding. Key Points About APY

• Includes Compounding: APY accounts for how often interest is compounded (e.g., daily, monthly, quarterly), which can significantly affect the total interest earned over time.
• Comparison Tool: APY provides a standard way to compare the annual interest earnings of different savings products, regardless of how frequently interest is compounded.
• Formula: The formula for calculating APY is:

  APY = (1 + r/n)^n - 1

  where r is the nominal interest rate (expressed as a decimal), and n is the number of compounding periods per year.
• Higher APY: A higher APY indicates that you will earn more interest on your money over a year, assuming the same principal amount.

Example For example, if a savings account offers an interest rate of 5% compounded monthly, the APY would be higher than 5% due to the effect of monthly compounding. This makes APY a useful metric for comparing the real return on different financial products.

You will receive a notice in the mail 30 days before the maturity date of your CD.

Once the initial deposit has been made funds cannot be added to the CD until maturity.  Once the CD matures you may add funds if you wish to renew the CD.

Although a CD is not necessarily liquid, it is considered one of the safest investments available. The longer CD you have, the higher the rate is going to be. There are no fees for the Certificate of Deposit, and you earn interest based on the balance in the CD.

People Driven offers multiple CDs starting from just a $25 minimum!  Please reach out to us at 248-263-4100 if you have any interest in a CD or check out our CD pages!

When you’re comparing savings accounts, CDs, or other financial products, you’ll often see two numbers: an interest rate (or dividend rate, if it’s a credit union account) and an Annual Percentage Yield (APY). At first glance, they might seem like the same thing—but they’re not. Knowing the difference helps you make smarter financial choices, whether you’re opening a savings account or making a long-term investment. Let’s break it down.

Interest Rate or Dividend Rate: the Base Number

Interest Rate

The interest rate is the basic percentage a bank or credit union uses to calculate how much you’ll pay on a loan or earn on a deposit, before considering how often interest is added (compounded). Let’s say you open a credit union savings account with an interest rate of 3.00%. That’s the base rate your money earns before compounding is applied.

Dividend Rate

At a credit union, the term "dividend rate" is often used instead of "interest rate" for deposit accounts. As a member-owner, you’re technically receiving a share of the credit union’s earnings—similar to a dividend from a company. Functionally, though, the dividend rate works the same way as an interest rate on a bank account.

Annual Percentage: the Full Picture of Earnings or Costs

Annual Percentage Yield (APY)

APY shows how much you earn in a year on deposits, including the effects of compounding. Compounding is the process of earning interest on your interest (for deposits) or being charged interest on interest (for loans).  If your account compounds interest daily or monthly, you’ll earn a bit more than the base rate, because you start earning interest on the interest that’s already been added. That extra boost from compounding is why the APY is slightly higher than the interest/dividend rate.

Compounding Interest: Dividend Rate vs APY

APY provides a clearer picture of the actual annual earnings from savings accounts, money markets, and certificates because it includes compounding. For loans, APR is the more accurate number for comparing costs between offers, because it reflects compounding as well as fees.

• Interest Rate/Dividend Rate: If a savings account offers a 5% interest rate compounded monthly, the nominal rate is 5%. This is the base number for how much your balance will grow before compounding.
• APY: When considering the monthly compounding, the same account will have an APY slightly higher than 5% because the interest earned each month also earns interest in subsequent months.

Comparing Financial Offers Using APY

If you only look at the interest or dividend rate, you might think two products are equal—but differences in compounding or fees can make one clearly better for your wallet. A savings account with a slightly lower rate but daily compounding could earn you more than one with a higher rate but annual compounding.

Interest Rate vs APY Example

Always use APY when comparing savings products from different institutions. Knowing the difference between the base rate and APY helps you see the full picture, allowing you to make confident choices—whether you’re saving for a big purchase or making long-term investments. Let’s compare two savings accounts:  

Account	Dividend/ Interest Rate	Compounding	APY
A	3.00%	Annual	3.00%
B	3.00%	Monthly	3.04%

Both accounts have the same base rate, but because Account B compounds monthly, the APY is slightly higher. That’s the effect of compounding.

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1. How often are dividends compounded?

Dividends on savings, money market accounts, and certificates are typically compounded and credited monthly unless otherwise stated in the account disclosure. Compounding helps your balance grow by earning dividends on previously earned dividends.

2. Why is the APY higher than the dividend rate on a certificate?

The dividend rate is the base rate used to calculate earnings. APY shows what you actually earn over a year, including compounding. Because dividends are compounded, the APY is slightly higher than the dividend rate.

3. What is the difference between APY and APR?

APY applies to deposit accounts and shows how much you earn in a year. APR applies to loans and shows the total yearly cost of borrowing, including certain fees. Use APY when comparing savings products and APR when comparing loans.

4. Does compounding frequency really make a difference?

Yes. The more often dividends are compounded, the sooner you begin earning dividends on previously earned dividends. Over time, even small differences can increase your total earnings.

5. When comparing accounts, should I look at the dividend rate or APY?

APY is the better number to compare. It reflects the total amount you can expect to earn over a year, including compounding, giving you a clearer picture of your true return.

A Certificate of Deposit is a secure and reliable savings tool that offers higher interest rates in exchange for committing your funds for a fixed period. It's an excellent option for those looking to achieve specific financial goals with minimal risk. Key Features of a Certificate of Deposit (CD):

• Fixed Term: CDs have a specified term or maturity date, which can range from a few months to several years. Common terms are 6 months, 1 year, 2 years, or 5 years.
• Interest Rate: CDs typically offer a higher interest rate than regular savings accounts. The rate is fixed for the duration of the term, providing a predictable return on investment.
• Minimum Deposit: Many CDs require a minimum deposit to open, which can vary depending on the financial institution and the specific CD product.
• Early Withdrawal Penalties: Withdrawing funds from a CD before it matures usually incurs a penalty, which can reduce or negate the interest earned. Some CDs offer more flexible terms with lower penalties or no penalties for early withdrawal, but these often come with lower interest rates.
• FDIC/NCUA Insurance: CDs from banks are typically insured by the Federal Deposit Insurance Corporation (FDIC), and CDs from credit unions are insured by the National Credit Union Administration (NCUA), up to the maximum limit allowed by law.

A CD (Certificate of Deposit) Ladder is an investment strategy that involves dividing a sum of money into multiple CDs with different maturity dates. The primary goal of this approach is to balance the benefits of earning higher interest rates on longer-term CDs while maintaining liquidity by having funds become available periodically. Here’s how it works: How a CD Ladder Works

1. Divide Your Investment:
   • You start by dividing your total investment into equal parts. For example, if you have $10,000, you might divide it into five parts of $2,000 each.
2. Purchase CDs with Staggered Maturities:
   • Invest each portion in CDs with different maturities. For instance, you could buy a 1-year CD, a 2-year CD, a 3-year CD, a 4-year CD, and a 5-year CD.
3. Reinvest as CDs Mature:
   • As each CD matures, you reinvest the principal (and interest, if desired) into a new CD with the longest term in your ladder. For example, when the 1-year CD matures, you would reinvest that amount into a new 5-year CD and continue this process as each CD matures.

Benefits of a CD Ladder

1. Higher Interest Rates:
   • Longer-term CDs typically offer higher interest rates compared to short-term CDs. By using a ladder strategy, you can take advantage of these higher rates for at least a portion of your investment.
2. Regular Access to Funds:
   • A portion of your investment will mature at regular intervals (e.g., every year), giving you periodic access to your money without penalty. This can be useful for meeting short-term financial needs or taking advantage of new investment opportunities.
3. Reduced Interest Rate Risk:
   • By spreading your investment across CDs with varying maturities, you reduce the risk of being locked into a low-interest rate for an extended period if rates rise. As each CD matures, you can reinvest at the current rates, potentially benefiting from higher interest rates.
4. Predictable Returns:
   • CDs are generally considered low-risk investments with fixed interest rates, providing predictable returns. This makes a CD ladder a stable and reliable investment strategy.

Example of a CD Ladder Let's say you have $10,000 to invest and you set up a 5-year CD ladder:

• Year 1:
  • Invest $2,000 in a 1-year CD
  • Invest $2,000 in a 2-year CD
  • Invest $2,000 in a 3-year CD
  • Invest $2,000 in a 4-year CD
  • Invest $2,000 in a 5-year CD
• Year 2:
  • The 1-year CD matures. Reinvest the $2,000 in a new 5-year CD.
  • The other CDs continue to mature according to their original terms.
• Year 3:
  • The 2-year CD matures. Reinvest the $2,000 in a new 5-year CD.
  • The other CDs continue to mature.
• Year 4:
  • The 3-year CD matures. Reinvest the $2,000 in a new 5-year CD.
  • The other CDs continue to mature.
• Year 5:
  • The 4-year CD matures. Reinvest the $2,000 in a new 5-year CD.
  • The 5-year CD continues to mature.

By the end of Year 5, you have a ladder of 5-year CDs maturing every year, providing you with a regular income stream and the opportunity to reinvest at current interest rates. A CD Ladder is an effective strategy to maximize returns while maintaining liquidity and reducing interest rate risk. It’s an excellent choice for conservative investors looking for a predictable and stable way to grow their savings. At People Driven Credit Union, we offer competitive rates and flexible terms to help you build a CD ladder that meets your financial goals. Contact us today to learn more about how you can get started with a CD Ladder and take control of your financial future. Set Up a CD Ladder