In today’s difficult economy, it is more important than ever to pay attention to the little details of personal finances.
Money kept in a typical savings accounts will earn very little interest, with many banks today paying as little as one tenth of one percent.
A certificate of deposit (CD) is one alternative that pays a better interest rate than a passbook savings account.
What is a Certificate of Deposit or CD?
A CD is a savings instrument that requires a deposit of a fixed amount of funds for a fixed amount of time in exchange for earning a higher interest rate.
CD’s can be bought with deposits of one thousand dollars or more, for terms ranging from a few months to several years (though you can find lower deposit requirements, $1000 tends to be the average). Certificates of deposit have early withdrawal fees which can amount to a substantial portion of the interest earned before the withdrawal (each bank has different rules on this).
Savers looking for where to buy the best certificate of deposit should shop for the best CD rates among local banks, or look online for deals on CD’s with higher interest rates (a high yield certificate of deposit).
Current CD rates vary from around one percent to over three percent, depending on size and maturity. The rate also depends on the current economy. CD rates tend to move in the same direction as Fed rates. Purchasers should be sure the issuing bank is a member of the Federal Deposit Insurance Corporation. FDIC insurance covers individual deposits up to $250,000 under current law.
Savers who want flexible use of their savings can build a CD ladder.
In this strategy, a saver with, for example, $5,000 to invest, might buy five $1,000 CD’s, each with a different maturity term — one year, two years, three years, four years, and five years. At the end of each year, the saver would cash in the CD that just matured and buy a new five year CD. This way the money stays fully invested, but the saver has access to one fifth of it every year without incurring penalties.
Investing in certificates of deposit is also a great way to help build up your emergency fund. Since you shouldn’t be spending your emergency fund, having it in a CD allows it to earn more interest. Should you need the money in an emergency, you can cash in the CD. Yes, there may be penalties, but you would have quick access to the money.