Certificates of deposit turn your money into more money. In this article, we’ll cover everything from what a certificate deposit is, why you should invest in them, how to get started, as well as the risks involved.
First, let’s start with a definition.
What is a certificate of deposit?
A certificate of deposit, or CD, is a deposit account that earns higher interest than your typical savings or money market account. The trade-off is that you have to make a large deposit in full and agree to not withdraw it until a set date, called the maturity date.
A common CD is $1,000 for one year, but the deposit amount and maturity date vary widely depending on your needs and the financial institution.
In simple terms, a certificate of deposit is a savings account that earns higher interest while locking your money away for an agreed-upon length of time.
The benefits of investing in a certificate of deposit:
First and foremost, certificate of deposit rates is higher than those of savings accounts. If you have a large sum sitting in your bank account and you don’t plan to use it soon, investing it in a CD is a smart personal finance move.
CDs use compound interest rates, meaning that you’ll earn interest on your interest as well. If a CD compounds monthly, you’ll receive interest each month, and it will be included in the interest calculation for the next month.
Additionally, the high-interest rate is locked in for the length of the term. Where rates for savings can change at any moment, CDs guarantee a high rate for years — certificates of deposit with Bank of America can extend as long as 10 years.
The risks associated with certificates of deposit:
The main risk in investing in a certificate of deposit is that you can’t access your money before the maturity date without penalty. Before you invest, ensure that you have sufficient emergency savings to cover unexpected costs without breaking your CD.
However, we can’t see the future. If you need that money, you can withdraw it with a penalty fee. Certificate of deposit penalties vary based on the financial institution, but it is usually a penalty of interest earned over a set period. For example, Bank of America collects a penalty of 180 days’ worth of interest for early withdrawal on CDs with terms of 12-60 months.
How to get started with a certificate of deposit:
First, decide how much you’re able to lock away in a certificate of deposit and for how long. Next, research certificate of deposit rates online based on your desired deposit and term. You can bank with a financial institution in your area or complete the entire process online. Once you’ve chosen an institution, all you have to do is make the deposit and watch your money grow.
Overall, certificates of deposit offer investors a safe and secure way to grow their money without any additional work. You don’t have to be a money-savvy person to benefit from CDs. They’re very simple, and it’s a great way to make money simply by having money.
So, if you have extra savings sitting in your account, make the smart personal finance decision and invest in a certificate of deposit.