When finding the best fit for your savings goals, it helps to know the lingo.
You likely know what a savings account is, but how it—and other savings options—works can be confusing. That also goes for common financial terms we often see but aren’t often explained (or explained clearly). So, let’s take a look at a few savings-related terms—both what they mean and what that means for you.
Interest
What does it mean?
For deposit accounts, such as a savings account or certificate, interest is the amount you earn on top of the amount you deposit. Basically, interest earned is what financial institutions pay you for keeping your money with them. (On the other hand, interest paid, like when you take out a loan, is what a financial institution charges you to borrow the money.)
What does it mean for you?
By keeping your money in an interest-earning account for a longer period of time, your savings can multiply as time goes on by earning interest on the interest (this is known as compound interest). In short, the more you have in savings for longer, the more you earn.
Certificate
What does it mean?
A certificate is a type of savings account that earns interest on a lump sum over a predetermined period (similar to a CD). Certificates will earn you much more than a standard savings account, though you'll need to leave your money untouched for a set amount of time (the certificate “term”) to avoid an early-withdrawal penalty. The good news is, certificate terms run the gamut, from a few months (if you don’t want to lock up your money for long) to a few years.
What does it mean for you?
There's some patience required with certificates, but the payoff can be significant, since certificates usually have much higher rates than savings accounts. Rates are generally higher for multiple-year terms, but with many different terms available, you don’t need to tie up your money forever. And unlike the stock market, certificates are a sure thing.
APY (Annual Percentage Yield)
What does it mean?
The annual yield of a savings product (displayed as a percentage) tells you how much you’ll earn if you keep your money in that account for one year.
What does it mean for you?
APY helps you determine which savings options will earn the most over time. With a higher-APY product, your savings can grow even faster as the interest compounds (i.e., as you earn interest on your earned interest). As the deposit amount and time invested increase, the earnings become more significant. See for yourself how much you can earn using this free online calculator.
Liquidity
What does it mean?
Liquidity refers to how quickly individuals or businesses can convert assets (like money deposited in a checking account or a certificate) to cash without negatively affecting their value.
What does it mean for you?
In addition to actual cash, many deposit products (for example savings and checking accounts) are considered viable liquid assets because money can be withdrawn easily to settle liabilities. Certificates are also considered liquid assets, since you can withdraw early (though, as mentioned above, you will incur an early-withdrawal penalty). Fortunately, there are short-term certificate options (3 months, 6 months, 12 months), so you don't need to stash your cash for long to earn higher dividends.
Hopefully, this brief savings glossary will help lift the fog over terms you may have heard many times but were never fully explained. But remember, no two savings goals are the same, and some savings options will fit your needs better than others. If you’d like to talk through the best savings path for your goals and needs (or if you have questions about other financial terminology), stop by your nearest SELCO branch or contact a representative. We’re ready to help.
