What is a CD Investment?
Setting aside a portion of your salary or other sources of income is important nowadays. One way to invest your savings is through certificates of deposit or CDs. This article is all about what is a certificate of deposit and how does it work.
WHAT IS A CD INVESTMENT?
A Certificate of deposit is a way or tool of your saving in a bank that is low-risk that can boost the principal amount of money invested through the interest income you will earn in a certain period most safely. Like other bank savings accounts, CDs are considered investments as low-risk since they are insured by the FDIC up to the amount of $250,000. Generally, CDs permit your bank savings to increase quickly compared to your savings account.
HOW DO CDS WORK?
As you deposit your money in a bank, there is an exchange for that transaction for a fixed period which is called the duration or term. The bank will pay you an interest rate that is fixed that is usually higher compared to the interest rates you will earn on a bank savings account. When you decide to invest in CD, you can’t use or withdraw the money before the term comes or when the duration ends unless you will pay the penalty fee. The withdrawal penalty can affect you are earnings as it will decrease the earned interest on your CD. So, make sure before you will open a CD account, ensure to have an emergency fund available on hand so you can use this money for emergency purposes and other urgent situations. When the maturity date comes, you will get back the principal amount of money you invested plus the interest amount that has been accrued or earned during the term.
HOW DO MINIMUM BALANCES, TERMS, AND INTEREST RATES INTERACT?
Certificates of deposit come in various conditions and normally require a minimum balance when you open a CD. Bank interest rate varies by its term and the amount of money you invested in your account. The higher the amount you will invest and the longer the term or its duration, then the more interest rate you will earn compared to investing in a minimal amount and early term. Like bank savings accounts, CDs also incurred interest that is compounded periodically wherein the interest you will earn in a month or a quarter will be added to the principal amount. Then, your new total amount with the added interest amount earned will now earn interest for the new month and so on. When the involvement of compound interest, it is significant to comprehend the difference between the APY or annual percentage yield and the interest rate. The APY represents the amount of money you will earn in 1 year while the interest rate is the fixed rate of interest you will receive taking into consideration the compound interest in your account.
CHOOSING THE RIGHT CD
There are different factors to contemplate before you decide on investing in a CD. The first thing to consider is the period like when are you going to need the money. If you want to have the money soon, then consider investing in a short-term CD. But if you have the emergency fund and other sources of income and you don’t need it immediately, then CD long-term investment is the best for you as you will earn more with the higher amount and the longer term. Next is the principal amount of CD you will invest. Banks normally require a minimum amount for you to start investing. If you have the money, better save it the soonest before your decisions change and it might proceed with other unnecessary expenses. You also need to consider the economic environment. If the business market or economy is good like the interest rate is high, then don’t miss that chance.
BENEFITS OF INVESTING IN CERTIFICATE OF DEPOSIT
1. IT IS A SAFE CHOICE.
CDs are FDIC insured up to the maximum amount that is allowed by state law. Your money is in good hands especially when you invest in a bank that operates for how many years and are known for its best services. One of the important benefits of CD is not like stocks wherein it is risky since you don’t know the day when it will be high or low it is impossible to lose or gain a large amount in just one single day, your money invested in CD will keep on growing up to its maturity period.
2. CDS HAVE FIXED INTEREST RATES FOR A PARTICULAR FIXED TERM.
Financial markets can be unpredictable and the returns for your investments in real estate or the stock market are volatile or the risks of investing in cryptocurrencies are too high. One good thing here in CD is you can lock in the amount in a bank interest rate within the agreed period. Unlike the market fluctuations of other investments, a CD will grow continuously even if it is not that high but you know that your money keeps on earning.
3. CDS HAVE DIFFERENT MATURITY DATES.
One of the important key benefits of CD is it can give you a safer place to save your funds for a set period that is aligned and will help you with your financial goals. You will sacrifice in the meantime but when the term ends, you will reap the fruits of your invested money and it can surely help you save for a bigger expense.
4. CDS MAY HAVE LOW OR NO HIDDEN FEES.
Another advantage of CD is that it has either low or no fees at all. Some commercial banks do not charge monthly fees in setting up an account or for holding your invested money in a CD. It is significant also to consider that even if there is no monthly fee, expect also other costs to be associated with this kind of investment like the early withdrawal penalty. Thus, it is necessary when you start to invest, ensure to read and understand the terms and conditions, especially its fees and penalties for you to be aware of all of its other costs.