Score
A Certificate of Deposit Today!
If you're looking for an investment that protects your capital while
giving you a higher return than traditional savings accounts, Certificates
of Deposit (CDs) are a smart option. They are FDIC insured which means
that your money is protected by the US Government up to $100,000. And
they yield the highest interest rates of all bank savings programs.
But not all Certificates of Deposit are alike. You'll find that terms
and interest rates may vary, as well as early withdrawal penalties.
Our BankSITETM Directory
will help you find a bank near you for more details. But first, be sure
to take our One-Minute Certificate
of Deposit Test to help you decide whether a short-, medium-
or long-term CD will give you the advantages you're looking for. Then,
compare your test score to the chart below.
How
CDs Work...
A
Certificate of Deposit is a time deposit. When you purchase one,
you are basically giving the bank the right to hold your money for a
fixed period of time. In return, the bank gives you a higher rate of
interest than you would normally get in a savings or money market account,
where you may withdraw your money at any time. With a CD, there are
generally stiff penalties for early withdrawal.
Like all savings accounts, your money is insured by the FDIC up to
$100,000 per institution. As such, some individuals that invest
more than $100,000 like to diversify their funds with several institutions.
CDs, however, are not entirely without risk. The risk comes from
outside the investment itself as a result of the way interest rates
change over time. For example, the interest rate of your CD is fixed
for the duration of your investment. This gives you the ability to predict,
and to some extent protect your return. If interest rates are dropping,
locking money into a CD will shield you against lower interest rates.
On the other hand, if interest rates are rising, locking yourself into
a long term CD will prevent you from taking advantage of the additional
revenues higher interest rates will produce.
Taking out a CD requires a minimum deposit. Most institutions
offer a $500 Certificate of Deposit, however some banks will allow you
to open a CD with as little as $250. And normally, banks offer a higher
interest rate with a higher minimum deposit.
The day the term of your CD ends is called its "maturation date."
This can range from a few days to 10 or more years. You're usually rewarded
for choosing a longer term with a higher interest rate.
How your interest is paid to you differs from financial institution
to financial institution. Some banks send you a check. Others deposit
the money automatically into your account. How often interest is credited
also varies. Some pay at regular intervals; others wait until the end
of the term.
To make CDs more attractive and themselves more competitive, some banks
offer variations on the traditional CD formula. These include: Add-on
CDs, where you can add to your initial deposit; Early-withdrawal
CDs, which allow you to withdraw part of your principal before the
maturation date; and Upgradable CDs, where you can change the
interest rate you're paid to a higher rate.
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Tips On Getting The Most From Your CDs
While
the risk is low with Certificates of Deposit, you pay for that security
with a lower rate of return than with some other forms of investment.
So the wise investor placing money in CDs looks for ways to maximize the
return.
Here are some investment tips that can help:
CD Tip #1: Choose the longest term you can afford. The longer the
term, the higher the interest rate offered.
CD Tip #2: Allow interest to compound. Don't spend your interest
when you receive it. Let it build up and earn interest on the interest.
If you invest $500 at 8%, for example, and allow the interest to compound,
you'll have more than doubled your money at the end of 10 years. You'll
have received $574 in interest alone over the 10 years. Take it out when
you receive it and you'll only receive $400 in interest over the 10 years.
CD Tip #3: Decide whether you anticipate that interest rates will
be rising or falling. If you think they will rise, then keep your money
in a short-term CD until rates reach a point where they are high enough
to represent an attractive return for you. At that point, switch to a
longer term. If you feel they will drop, protect yourself against lower
interest rates by keeping your money in a long-term CD.
CD Tip #4: Ascertain your needs and goals. Do you need income?
Now or later? How available does your money need to be? Plan your investing
to meet those needs and goals.
CD Tip #5: Determine how much liquidity you need. Keep only the
amount of money necessary to cover short term needs in a short-term CD.
Keep the rest in longer term, higher interest CDs.
CD Tip #6: Define how much risk you are willing to take. CDs are
low risk, but offer a lower return compared to other types of investments.
Keep only the amount you need to shelter from risk in CDs.
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