CRACKING THE CODE ON A CERTIFICATE OF DEPOSIT (CD)

A certificate of deposit can be used for short-term savings but can also be used for the long-term as the funds cannot be accessed whenever you would like. To withdraw money from a certificate of deposit without incurring a penalty, you have to wait until the certificate of deposit’s maturity date has occurred.

A certificate of deposit is a loan that you will agree to with your bank. During this time, your money will be locked-in for a certain amount of time until it reaches its maturity date. You can specify a variety of longer terms for your certificate of deposit. These can range from six months to a year and up to five years or more. During this time, the bank agrees to a non-fluctuating, guaranteed interest rate that will be applied when your CD matures at its six-month, one-year, two-year etc. mark. Offering your money to a certain bank exclusively for a set amount of time can help you build wealth faster.

FDIC or NCUA

There is no need to worry about investing your money in a certificate of deposit because $250,000 is covered by the Federal Deposit Insurance Corporation (FDIC)  or the National Credit Union Association (NCUA) through a credit union. This organization ensures that your money is protected up to this amount even if the economy or bank has financial problems. This makes your investment a lot safer because you do not have to worry about losing your money.

HOW DOES INTEREST WORK?

The national average for certificates of deposit depends on the term length. As of October 2018, a 1-year CD is 0.72%, 2-year is 0.94%, and 5-year is 1.29%. Looking at the interest of your certificate of deposit is crucial to see if it is high enough to justify locking your money up for a period of months to years. If you think you may need the money faster than six months, you may want to open a savings account instead.

You can withdraw money from your certificate of deposit before its maturity date, but there may be a penalty fee. These fees differ depending on how long your certificate of deposit’s term length is. If your term length is less than a year, you may lose three months of interest. For a 1-year to 2-year CD, you may lose six months and a full year will be removed if you have selected a 5-year CD.

OTHER THINGS YOU SHOULD CONSIDER WHEN SEARCHING FOR A CERTIFICATE OF DEPOSIT

Shop around.

Before applying for a certificate of deposit, it is best to look for a high-yield CD. These may have differing lengths, so it is best to get one that fits your life. When researching, consider the Annual Percentage Yield (APY), which is the number of times your interest compounds. The higher your APY, the quicker your money grows over your term length.

In addition, it is important to know the standard CD rates before choosing your own contract. As of October 2018, a 1-year CD has a 0.28% APY when the deposit is less than $100,000 and a five-year CD has a 0.88% APY. Knowing these numbers can help you make an informed decision for your future.

Follow market trends.

The market is an ever-changing entity. Before purchasing a CD, it is important to look at the possibility of the rates rising. Kiplinger is an excellent site to check possible rates. It offers the leading financial information so you can make the best decision. After you have acquired this information, purchasing a short-term CD and cashing it in December can help you get a better rate. After you have cashed your funds, you can open a longer term CD with a higher rate.

Search for different CD types.

There are many different CDs available, so you have many options to choose from. These may have rates that can be adjusted or other features that allow you to increase your rate or cash your money before it reaches its maturity date. Here are other CDS you may want to look into:

Bump-up CDs:

When you choose a bump-up CD, you can upgrade your CD to a higher interest rate one time if your rates rise during this time period.

Indexed CDs:

These are matched with the rise and fall of the market index or the currencies, bonds, or commodity prices of the economy. A risk of this CD is that you may not get your full deposit back if you remove your money early.

Callable CDs:

These CDs often have longer terms than most other CDs. Their terms can be from five to seven years. They have higher interest rates than others that have the same term lengths, but the bank can cancel a callable CD at any time.

Brokered CDs:

These investments are from a brokerage firm and not a credit union or bank. These offer higher interest rates and can be an excellent investment.

CD Laddering:

If you do not want to have your money tied up for a long time, you can opt for a CD ladder. In order to do this, you would open multiple CDs with differing maturity dates. For instance, you could open five CDs (1-year, 2-year, 3-year, 4-year, 5-year) and place an initial deposit. As each CD matures, you can invest the money into the larger 5-year CD so it can operate at a higher interest rate.

In summary, there are many options available. Researching widely and discussing your options with a financial adviser are an excellent way to build the future you want. A certificate of deposit is a great way to keep your money safe, growing, and ready for you as you become older.