Saving Advice -
When you’re looking at potential investments, certificates of deposit (CDs) are options that are worth exploring. They offer better returns than many savings accounts but aren’t subject to the volatility that can come with stocks. If you’re wondering whether investing in CDs is right for you, here’s what you need to know.
What Are CDs, and How Do CDs Work?
A CD is a savings product that’s associated with a specific fixed interest rate and provides a lump sum payment after a preselected time period passes. Generally, they offer better returns than savings accounts but come with less liquidity.
There’s no active management of CDs. Once the deposit is made, you simply leave the money in the account, and it earns interest. As long as you keep the money in place for the entire term, you get the deposit back along with the accumulated interest in a lump sum. Early withdrawals do allow you to access your deposit, but they also trigger penalties – like forfeited interest – and fees.
One critical point to understand is that addressing what happens to the fund when the maturity date arrives is essential. Typically, you have a specific time window to make decisions about the money, such as whether you’ll withdraw the funds or transfer them to another account. If you don’t make a choice within the outlined timeframe in the agreement, the money may automatically roll over into a new CD, and that can make accessing the cash without paying a penalty difficult and may assign a new interest rate that isn’t as favorable.
What Are CDs Good For?
Usually, CDs are a solid choice for short-term savings goals. They inherently have shorter timelines, usually no more than five years, and come with interest rates that are typically above what’s available through savings accounts at the time they’re issued.
Plus, unlike stocks, there is essentially no risk of losses, and the earnings are functionally guaranteed. CDs are FDIC insured for up to $250,000 (depending on the value of other accounts at the same institutions), which can provide significant peace of mind.
How to Invest in CDs
In many cases, opening a CD is highly similar to opening other types of bank accounts. CDs are available through a wide variety of banks and credit unions, making them incredibly accessible.
When you’re looking at CDs, you’ll need to examine a few points. First, minimum deposit requirements can vary. As a result, you need to find a CD that’s available for the amount you’re prepared to deposit.
Next, you’ll want to examine the required term and the interest rate. CDs may have terms as short as six months or as long as several years. The maturity date associated with the CD tells you exactly when the term comes to an end, giving you a specific day that you can withdraw the funds without facing a penalty fee.
Often, the interest rates vary depending on the term. However, you do need to make sure that the maturity date works based on your savings goals. Early withdrawals can trigger fees or may forfeit any earned interest, so don’t select a term that isn’t manageable.
Once you find the right CD, you can open the account. After the deposit is in place, you’ll receive statements throughout the year to help you track interest payments and other details. When the maturity date arrives, you can then transfer the funds to a bank account, withdraw the money, or roll the cash into a new CD with the same bank or credit union, giving you a lot of flexibility about what happens next.
Do you have any other tips or insights that can help someone who’s planning on investing in CDs for the first time? Do you think that CDs are a good investment option? Share your thoughts in the comments below.
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