A CD or certificate of deposit, is a low risk, fairly high return investment. You agree to deposit a set amount of money for a set amount of time and in return your bank will pay you a set amount of interest (sometimes the interest rate will be flexible but often it’s a set rate). CD’s are covered under the FDIC insurance or NCUA for a credit union.
This method of investing is far more secure than the stock market, and you will make more money than you would with a standard savings account but it does have it’s downsides.
Here are a few things to keep in mind while deciding if investing in CD’s is right for you:
1) You can go to various websites like bankrate.com to compare interest rates. Just remember interest rates are only one of the things you should take into account when considering opening a CD.
2) The terms can be a few months to 15 -20 years, generally the longer the term the higher the interest rate. If you start early and you are investing for college or retirement this may not be a bad way to go.
3) You will incur substantial penalties if you withdraw your money early. You will lose some, or maybe even all, of your interest. The bank is paying you a higher interest rate so they have a guarantee that the money will be available for a set time. That’s why they will hit you with a big penalty if you close your account early.
It’s very important that you fully understand the penalty amounts and when they will be accessed. Different banks will have different penalty amounts, compare them before you choose a particular bank.
4) You need large deposits usually between $500- $1,000 to open a CD. If you are just starting out you may not have enough money to deposit. You can open a CD at your local bank or credit union, online banks, or with a brokerage house.
Taking control of your finances now can lead to a much more secure, and less stressful, future. Finding high cd rates and opening an account is a great way for you to prepare for your future, but just like with any investment option CD’s are not for everyone. Make sure you know all the facts before you hand over your money.