What Is A Certificate Of Deposit
A certificate of deposit, or CD, is a great savings option, particularly for people who are risk adverse. A CD pays a higher interest rate than a regular savings account and they can be federally insured like a regular savings account. The term length varies and you get to choose how long a term you want, the term can range from three months up to 20 years. Basically the longer the term is the higher the interest rate. The problem with having a long term account is that if for any reason you need to access your money before the term is over you can pay penalty fees and lose a considerable amount of interest. There is a banking website called bankrate.com which compares the interest rates of financial institutions so this website can help you to find the best certificate of deposit with the best rates.
Don’t just rush in to any certificate of deposit; there are some questions that you should ask before going ahead:
1. You need to find out when the CD will mature and ask if they will put that date in writing. You don’t want to put your money into a CD thinking it’s a five year term only to find out that the term is 20 years. You also need to find out how much deposit you need to purchase the certificate of deposit. The larger amount of deposit and the term of the CD will determine the interest rate.
2. You need to find out what the interest rate will be and how it will be paid. Is the rate a fixed rate or a variable rate? Once again you want to get this information in writing. You will want to know if the interest is paid monthly, twice a year, yearly, etc? If the certificate of deposit is a variable rate then you will want to know when the rate will adjust and again you will want this in writing.
Just a note: if your certificate of deposit pays out the interest payments during the term of the CD the total return on your investment will decrease as this interest is deducted and won’t be compounded. It can often be better to keep the interest in the bank and let it compound, increasing the total return on your investment. Not all banks will offer this option. You will need to choose one option and that will then remain the same for the term of the CD.
3. You will usually receive a higher interest rate with Non-insured CD’s. However, one of the biggest advantages of certificate of deposits is the fact that they are insured federally so you do want to be careful with a non-insured CD. This is a very important decision to make as although the higher interest rate is appealing, it is possible you could lose the lot.
Certificate of deposits are a great option if you are looking for a safe investment with a reasonably high earning. But when looking for a certificate of deposit you need to look at more than just the interest rate, you want to ask questions and fully understand all the aspects of the CD before you buy it.