If you’re looking to make your money grow, why not consider CDs — as in Certificate of Deposits?
While opening a CD can be a good investment, it won’t make you a millionaire, however, knowing how CDs work can help your money grow as much as possible. Ultimately, this comes down to possibly having a bit more money in your wallet.
Here are some quick tips and basic explanations about CDs and why you might want to open one the next time you are at the bank.
Why Open a CD?
One reason as to why you would want to open a CD to begin with is the interest rates and the low level of risk. CDs — known as share certificates at credit unions — have higher interest rates than savings or checking accounts. This means your money will grow faster in a CD than in other deposit accounts. But the higher rates do come with a caveat: Funds are put in CDs for a certain amount of time, and you can’t access the money early without paying a penalty.
Interest rates on CDs usually increase with the term lengths of the certificate, and sometimes with the amount you add to them. According to a story posted on Nerdwallet.com: “The average 1-year certificate rate for $10,000 in the first fiscal quarter of 2017 was 0.44% for banks and 0.55% for credit unions, according to the National Credit Union Administration. Compare that with the average savings account rate at 0.12% at banks and 0.13% at credit unions. Rates also can fluctuate depending on interest rates set by the Federal Reserve.”
Another great thing about CDs is that they are virtually risk-free, and you could get up to $250,000 of your money back if your bank fails, due to a guarantee from the Federal Deposit Insurance Corp. Midrange CDs — with terms of one to five years — are considered safer than stocks and more profitable than savings accounts, which makes them the best middle-of-the-road investing option.
So, now that you have decided you want to invest in a CD, when should you take the plunge? Some say when you are at a stage in your life when you can part with your money from three to 10 years.
Also, according to the article posted by Nerdwallet.com: “CDs of shorter term lengths, typically three to 12 months, will have lower interest rates.” Typically, the returns aren’t as competitive and you may be better off investing money in a high-interest savings account. All in all, investing in a short-term CD may be helpful if you want to put aside the temptation to spend that cash over a particular time period.
You Need a Nest-Egg
Keep in mind, CDs may have minimum deposit requirements — usually $500 or $1,000 depending on the bank — you’ll need to have at least that amount saved to open a CD.
Make sure before you get a CD that you have enough savings pocketed away in case of an emergency for at least three to six months’ worth of daily living expenses. If you don’t, you could pay a fee if you decide to withdraw your money before the certificate matures. Some banks do offer no-penalty CDs, but rates and term lengths could also be limited.
How Do CDs Work?
If you’re wondering how CDs actually work, here is a quick synopsis: First, there are a few types of CDs, including those called “Jumbo” CDs with high minimum-balance requirements and “IRA” CDs held in tax-advantaged accounts.
However, they pretty much do work the same way: Put in money for a set period of time and earn interest until the CDs mature, at which point you may collect the full amount. You may be able to opt to have the growing interest transferred to a checking or savings account, or leave it in the CD.
If you have long-term savings goals that go beyond five years, your money can grow faster in an investment account vs. a CD. However, these types of accounts tend to have higher risk — meaning there’s a bigger chance to lose your money. When in doubt or if you need more information about CDs, contact your bank or broker who can point you in the right direc