Certificates of Deposits, otherwise known as CD’s are relatively safe investments. They are easy to obtain and are issued most often by banks and credit unions. While Certificates of Deposits yield lower returns than other types of investments, they are FDIC insured making them attractive for conservative investors as well as those investors who want to keep some of their money in a more secure place.
CD’s, essentially, are you making a loan to the bank and them paying you interest in return for holding your money. How it works is that you, as the investor, deposit a lump sum, starting at $500.00 up to thousands of dollars.
When you deposit the money you agree to leave it in the bank for a certain term. Terms start at one month and can go up to several years. The more money you invest and the longer term you chose, the more interest you will make. CD’s almost always carry a slightly better interest rate than a bank savings account.
Why should you invest in CD’s? What are the benefits of investing in CD’S? Let’s take a look.
As already stated CD’s are a secure investment since they are FDIC insured. Most investors do recommend that some of your money should be invested into secure accounts. While you are not going to get rich by putting some of your savings into CD’s, you will still yield some interest. CD’s are very often opened by investors who like to air on the conservative side.
Monies that you deposit into CD’s are accessible once they mature, and when you invest the money you decide what the term will be. CD’s are a great place to put money if you know you are going to need to access it in the near future, like for a down payment on a home or another larger purchase. They are also a great place to keep the part of your savings that you deem your emergency fund.
It is important to note that while CD’s are easy to access once they mature, if for some reason you need to withdraw your money early, there will be penalty fees to pay. One technique many CD investors use to make their money even more accessible is to create what is called a CD ladder.
A CD ladder is when the investor will purchase several CD’s, all with varying maturity dates. So if the investor had 5,000 to invest they might choose to invest in 5 different CD’s, each containing $1,000. The first one might mature in 6 months, the second in one year, the third in 18 months and so on. This allows the investor to have access to part of their money every 6 months. When the CD’s mature, the investor then will typically reinvest the money into a new CD, having the new CD mature date be after the last CD in the ladder.
Before investing in CD’s, just like with any other investment product, be sure to do some comparison shopping. You will want to compare interest rates and terms of several different CD products at a few different banks and credit unions.
While most CD’s come with a fixed interest rate, there are some that come with an adjustable rate. Be sure to read the fine print to know what the penalties will be for early withdrawal and always make sure that you know when the CD will mature.
Barbara Montgomery is a freelance writer who specializes in articles and blog posts on numerous topics including banking, finance, debt management, health, travel and more. She is a frequent writer for reliablewriters.com and a guest blogger for DepositAccounts.com, where you can compare savings account rates from dozens of banks in one place.