It is essential to know what a CD is.
A Certificate of Deposit is a low-risk saving financing product that can increase your earnings in interest while securely saving your investment for future use.
A Certificate of Deposit (CD) is a low-risk savings account offered by commercial banks to boost your earnings in interest as you securely invest your cash. This kind of investment is ideal for the money that you don’t intend to use any time soon.
In a CD, you are required to leave your money until the maturity date for the bank to give you an interest rate that is higher than that of a market or checking account.
What is a CD?
This particular type of term deposit is usually issued for specific reference duration of up to 12 months, for a specific amount and interest rate. A CD can be fixed or variable account that is traded in the secondary money market. However, you need to wait until the maturity date for you to access the cash and they usually don’t have monthly charges.
Types of CDs
Traditional CD: the bank gives you a fixed interest rate over a specific duration. When the maturity date is due, you can take out the cash or create a new CD and continue savings. Be cautious not to withdraw before the maturity date since it will attract a heavy penalty.
Bump-up CD: The account will let you swap the interest rate of your CD for a higher one if the current rate on the new CD of the same terms goes up during the investment duration.
Many banks that provide this form of certificate deposit allows you to bump up once during the period of the investment. You can also withdraw the savings for the remainder of the original CDs duration.
Liquid CD: With this type of CD, you can withdraw a portion of your savings without the bank asking you to pay the penalty. However, liquid CD attracts a lower interest rate than others, but still higher than what is offered in the money market account.
Zero-coupon cd: with this kind of investment, you don’t get annual interest but you can re-deposit the earnings so that you get an interest in the higher total deposit. The good thing about zero coupon is that it offers a higher interest rate.
Callable CD: A financial institution that offers a callable CD has the right to recall it after a set duration, give back your deposit together with all interest accumulated. Usually, the bank will do this once the interest rates go down drastically. Banks tend to offer higher interest rates for this type of CD to make it attractive.
How do CDs work?
Certificate of Deposit is the safest type of time deposit where you leave your money in a financial institution for a specified duration to get a promised return.
A CD, also known as share certificate will earn you higher interest than regular savings account. Financial institutions and credit unions agree to pay more for you to allow them to hold a lump sum for a specific duration called CDs term.
Some banks and credit unions will ensure your certificate of deposit up to $250, 000, just like with any savings account. Note that you risk paying a hefty penalty if you withdraw the cash before the maturity date.
As a general rule of thumb, your CD will attract a high interest rate when you sign an agreement with a longer duration. Depositing more cash in your CD account will help you boost your yearly percentage yield and sufficient income on your deposit that comes once the bank compounds the interest over the year.
Your CD will allow you to earn interest on the amount deposit until the maturity date, and withdraw all the accumulated amount.
Why you need a CD
In most cases, Certificate of Deposit is ideal for savers who have the financial flexibility to leave money lying idle in the bank for a period. However, you must be able to meet the minimum deposit requirements that usually range between $500 and $1000. You can also invest in the short-term CDs so that you can benefit from the high rates.
Before you decide the amount of deposit and duration for the CD, it is essential to pay attention to other financial obligations and time horizon. Ensure you have saved enough money for your emergency savings that can cover your expenses in time of need. Note that any cash you deposit in a CD will be locked until the investment duration expires and you cannot withdraw it before the end of the term to early withdrawal penalties.
How terms, minimum balances and rates interact
Certificate of Deposits are available in varying conditions and might need varying minimum balances. This means that the rate you earn will vary by the duration and the amount you deposit. Longer duration and higher deposit will give you higher rates.
CD ladders provide flexibility
CD laddering is designed for savers who want to take advantage of the higher rates offered by CD but are cautious about leaving their money for a longer duration usually between three to five years. In this case, you invest proportionately in a variety of investment duration. As each short investment term matures, you re-invest the earnings in a new certificate of deposits.
CDs allow you to save as it rewards you
Investing in a CD is not one of the fastest ways to increase your savings, but it is not perilous. A Certificate of Deposit that offers a higher rate can play a vital role in your general savings strategy.
It is essential to select the best CD account, use the laddering plan and wait until the CD matures to avoid early withdrawal penalties. This will help you get a handsome income on your cash as you have your savings protected by the federal government.