Advantages and Disadvantages of Add-On CDs

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If you were to deposit $100 initially and then add $500 each month into an add-on CD with a 24-month term and a 0.50% APY, after two years you would have saved $12,100. This includes your initial deposit and monthly contributions. With monthly compounding, you would earn $58.68 in interest. However, if you were to deposit the entire $12,100 into a traditional two-year CD with the same 0.50% APY, the value would grow to $12,221.58, earning you $62.90 more. This comparison shows that depositing the full amount upfront may yield higher returns, but the add-on CD could be a more feasible option for those with limited funds to save.

Key Points to Remember

  • A small saver certificate (SSC) is a savings account with a low minimum balance or no minimum requirement.
  • SSCs are commonly used by children or young adults.
  • They offer either a fixed or variable interest rate.
  • The most common terms for SSCs are three, six, 12, 18, or 24 months.
  • SSCs are not as popular as certificates of deposit (CDs).
  • They are often used by young individuals as a starting point for saving before moving on to more complex investments.
  • SSCs were introduced in the 1980s to compete with money market funds and encourage small savings.
  • Banks and credit unions strongly encourage individuals with SSCs to establish recurring deposits, typically on a biweekly or monthly basis. Many of them do not impose any monthly fees, and similar to savings accounts, SSCs are protected by federal insurance.
  • Moreover, certain SSCs offer features resembling those of checking accounts, such as mobile and online banking, which facilitate convenient investments. Additionally, they provide the convenience of paperless statements and the ability to make photo deposits.
  • When SSCs automatically renew, they may do so at a reduced rate. It is important to be aware of the renewal date and the corresponding rate. If you are prepared, it might be more advantageous to switch to a different financial instrument, such as a CD or a money market account.