CDs vs. Installment Savings Accounts: Which Is The Better Saving Strategy?
A disciplined way to save up these days could be by building up your money in an installment savings account. Although it is not yet a standard product of most banks, those who do offer it are getting some good responses primarily because of the decent rates that have been offered for this type of savings account.
The certificate of deposit (CD) on the other hand, is a traditional way of investing your funds in the bank for a fixed period of time and at a specific rate. However, with the CD rates steadily declining of late, putting one's money in a CD is no longer such an attractive option.
So which comes out ahead when it comes to investing options – the CD or the installment savings? Learn the basics of installment savings plans and find out if they are better options.
What is an Installment Savings Account?
An installment savings plan is a type of savings plan that lets the depositor build up his savings gradually by making fixed monthly deposits into the account instead of putting in an initial one-time deposit.
There is an agreed contract price upon opening of the account, and at the end of the established term, the sum of all the monthly deposits plus the interest earnings of the fund should equal to the contract price. The rates given for Installment Savings are typically higher than regular savings rates and even CD rates.
The installment plan is ideal for putting money aside for a specific goal or major expenditure in the future such as a wedding, a new car, or vacation expenses.
And with the higher interest thrown in, an installment savings is an alternative to just making sporadic transfers from your checking account to a separate savings account.
Rates and Actual Savings
Don't be fooled by a high APY. In the long run, you might not be earning as much interest as you think.
For instance, a 12-month Installment Savings program may offer an APY that is twice the rate found with a regular 12-month CD. But how does this translate in actual savings?
The main difference between these two savings plans is that with a CD, your one-time deposit, say $10,000 for instance, will already earn you the guaranteed APY from day one. In the case of the Installment Savings however, only your fixed monthly deposit (for a $10,000 contract amount) will earn the high APY initially, with the balance slowly growing as you make more deposits into the account each month.
This means that at the end of the 12-month period, your $10,000 CD at will actually earn more interest.
Tip: Use a CD calculator to get a better idea of how much interest you'll earn.With the installment savings account, the high APY applies to a balance that is still growing. The CD is already applying a generous APY on a large balance, which yields higher interest returns.
Penalties Do Apply
As with the CD, penalties are also charged for early withdrawals from an installment savings account.
It is in this aspect that the installment program is more comparable to the CD than to a regular savings account. The penalty charged is usually 90 to 180 days worth of interest.
When putting your funds in a CD, you'd only need to make a single visit to the branch, or online account opening as the case may be.
With an installment savings, you have the option of either setting up automatic transfers from your savings or checking account or mailing in a check a few days before the installment deposit is due. Other banks require you to maintain a regular savings or checking account with them if you don't have one already.
One rationale for this could be to offset the high rates given on the installment savings with a low-interest earning account.
CD Vs Installment Savings -- Finding What Fits You Best
Which really is the better choice, CDs or installment savings accounts? The answer would actually depend on your needs and savings habits.
If you've got already got a substantial amount saved up and want to maximize your earnings from it, then a CD is definitely the way to go.
If you're still saving up for a specific goal however, and could use a more disciplined approach and a higher rate as incentive, then you could start looking around for the best installment savings program for you. Just be sure to look at the fine print before you sign any contract.
More: Best CDs of the Year