Have you heard of a CD before? No, not a compact disc (CD), a certificate of deposit (CD). So what is a Certificate of Deposit by the way? A Certificate of Deposit is a type of savings account, in which you “lock up” a certain amount of money for a defined time frame (3-months, 6-months, 12-months, 36-months, 60-months). These are also called Time Deposits. The interest rate that is earned on the Certificate of Deposit, is most times higher than the amount earned on a regular savings account. Interest rates will vary, and the longer you commit to holding the Certificate of Deposit, the higher the interest rate you will earn.
Each financial institution may have different requirements and restrictions when it comes to Certificate of Deposits. For example, some institutions may require a minimum balance (example: $500, $1,000, or even $10,000), while others may not have a minimum balance. Also, the time frames could also vary. Some institutions offer terms starting at 3-months, or 6-months, while others may offer 12-months term or greater. You have to compare to see what rates are being offered for the different terms, to decide whether or not the extra interest to be earned, makes sense for the additional time that your money will not be accessible.
The goal of the Certificate of Deposit, is to have the money stay with the financial institution for the agreed term, and earn interest during that time frame. The money that is used for the Certificate of Deposit, is not available for withdrawal. If you decide to withdraw any of the funds before the length of the term is up, you will be hit with “early withdrawal penalty.” Early withdrawal penalty is when you lose some or all of the interest that you had earned, depending on how long you had agreed to hold the Certificate of Deposit for.
The Certificate of Deposit can be a great savings product, if you are not cash strapped, and have the discipline to leave the money for the time frame of your choosing. Some institutions offer the option to have your Certificate of Deposit automatically renew once the original term is completed. If you choose not to have your Certificate of Deposit automatically renew, you have the option to close or redeem your Certificate of Deposit at the end of the term.
Some institutions offer “step-up or ladder” Certificate of Deposits. These are usually longer term Certificate of Deposits that have a few mini-terms included in them. For example, if you had a 60-months term Certificate of Deposit, you could have 5 smaller 12-months terms included in that one Certificate of Deposit. The interest rate for the first mini-term would be lower, and for each additional term that is completed, the interest rate goes up. Just visualize a ladder or step, the more you climb, the higher you go, that is the same concept with the interest rate for this type of Certificate of Deposit.
If you are interested in adding a Certificate of Deposit to your savings portfolio, please research different financial institutions and do a comparison to see who offers the best interest rates for a time frame that you are willing to commit to, before you make your final decision. A great online resource to get you started is MagnifyMoney.com. Just enter your zip code, and your deposit amount, and click on “show info” to select your desired term. The default on the website is 1-year. Once you click on Update Results, you will see the interest rates that are being offered by hundreds of financial institutions. Be sure to thoroughly research any institution that interests you!
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