Certificates of Deposit, or "CDs," are like a mix of a "investment" and a savings account. CDs are different from other investments because they are backed by the government for up to $100,000. They also pay much more interest than a traditional savings account.
With a certificate of deposit, you can put away a certain amount of money for a certain amount of time. There are CDs with terms as short as one year, as long as five years, and even longer. The interest rate on a CD goes up the longer you keep your money there. When your time period is up and you cash out your certificate of deposit, you'll get both the original amount of money you put in and the interest that money earned while it was in the account.
Certificates of deposit are a great way to save money and earn a lot of interest, but they're not the best choice for people who might need to get their money out before the investment period is up. You can get your money out of a CD before the time is up, but you will either have to give up some of the interest you've earned or pay a fee. Financially, it's always better to leave money in a certificate of deposit, but it's nice to know you could get the money out if there was an emergency or you needed it before the time was up.
When you put money into a certificate of deposit, you can choose from a number of ways to earn interest. There are interest options with fixed rates, long-term CDs, and CDs with variable rates, among others. Ask if you don't know how each choice will affect your money.
Who Can Use Certificates of Deposit?
Even though anyone can buy a CD and put money in it, it makes the most sense for a younger investor to do so. Because Certificates of Deposit earn more interest the longer they are held, a younger investor can use them to diversify their portfolio and make the most money possible by holding on to them for a long time. But if someone is getting close to retirement and will need the money soon, this may not be the best way to invest.
Certificates of Deposit: What You Should Know
Before you put your money in a Certificate of Deposit (CD), it's important to know what some of the most common terms are.
There are penalties if you get out of the plan early. Even if you don't plan to take the money out of the CD before the end of the investment period, you should know what the penalties are in case something unexpected comes up and you need to use the money you put in the CD.
Interest: Always know if the interest rate is fixed or if it changes, and also how often interest is added to your CD.
Date of maturity: Every certificate of deposit has a date of maturity, but there are so many different dates that you should always make sure you know if your CD matures in 1 year, 5 years, or 20 years.
Call Features: Banks usually add a "call feature" to all CDs they give out. Callable CDs mean that if interest rates drop, the bank that gave you the CD can end it and give you back the amount you put in plus any unpaid interest.
There is a difference between a bank CD and a CD that is sold by a broker. If you use broker-dealer certificates, it's possible that small pieces of your CD are owned by groups of investors. No matter what kind of CD you choose, make sure that the FDIC will cover up to $100,000 of your money.
