Certificates of Deposit (CDs) are a popular form of financial investments these days because they are considered to be safer than many other types of savings and investments. It's important to have a good understanding of this type of investment to protect your financial safety and wealth.
How Do CDs Work?
It use to be that when you purchased a CD, you invested a fixed sum of money for a fixed period of time - six months, one year, five years, or more - and, in exchange, the issuing bank paid you interest, typically at regular intervals. When you cashed in or redeemed your CD, you received the money you originally invested plus any accrued interest. But if you redeemed your CD before it matured, you may have been charged an "early withdrawal" penalty.
Today things are somewhat different. While fixed rate CDs are still available, banks are also offering variable interest rates based on either a pre-set schedule or tied to the performance of a specified market index. They are also more flexible when it comes to early withdrawals.
You should always do your research prior to purchasing a CD.
Questions You Need to Ask Before Investing
Will my investment be insured? A CD should be insured by the FDIC for up to $250,000, per insured bank.
How long can I invest for? 3 months, 1 year, 5 years? CDs offer many choices for your investment dollars. The length of time to maturity varies and so do their interest rates.
What are the current interest rates and are they fixed or variable rates?
Each bank will have different CD choices. You should contact several different banks to see where you can get the best CD rates, terms and other factors to meet your needs.
Ask About Potential Penalties and Fees
Are there any penalties and fees or fines if you need to withdraw some of the money from the CD before it matures? This is very important because you want the money earning interest every day, however an emergency can arise that may require you to make a partial withdrawal of the principal of the CD and you want to know what that would cost you in real dollars.
What Happens to My CD When it Matures?
Most banks will automatically roll over the CD to another like-term CD if you do not redeem it within 10 days or so after it matures. You should get a notice in the mail a week or two before the maturity date, but don't rely on that. Keep track of maturity dates yourself to insure you know what's going on.
Should I Buy a CD on the Internet?
Years ago banking or investing online felt somewhat risky. Nowadays it is becoming the norm. Having said that, make sure to do extensive research both online and at your local bank to see what products, terms and interest rates are available. Whenever you are looking to invest a considerable amount of money you want to feel confident that you got the best rates and finance terms available.
As well you also want to make sure that all of your questions are answered and that you feel secure with the financial institution that you choose to deal with before you make your purchase.
Have you ever purchased a CD as part of your investment portfolio?