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As far as saving money is concerned, we all desire two things and that is security and growth. We would like our money to be secure, yet we would like it to work as well. A Certificate of Deposit or a CD fits in that.
One of the most basic financial instruments available is a CD, but it is quite capable of accomplishing some savings objectives. You have never opened one yet–it is not as difficult as you may imagine. In this guide, I will go through the fundamentals of the CDs, why they may be the right thing, and step-by-step instruction on how to open one.
What Exactly Is a CD?
Think of a CD as a deal between you and a bank. You put your money in the bank as a deposit- say 6 months, one year or even 5 years. The bank in turn pays you a better interest rate than on a normal savings account.
After the agreed time (also referred to as the maturity date) your money will be returned to you, along with the interest that you made. The catch? You will probably pay a penalty in case you withdraw your money before the due dates. CDs are, then, best when you are sure you will not need the money in the near future.
Why Consider a Certificate of Deposit?
CDs do not suit all people, but it works in certain circumstances. Some of the reasons why people like them are as follows:
- Stable Growth: As opposed to the stock market, CDs do not rise and fall. You are sure of what you are going to earn.
- Safety First: Your funds are insured by the FDIC (banks) or NCUA (credit unions) up to a limit of 250,000.00, and, therefore, you do not have to worry about losing your money.
- Good in the Short run: Want to save up a vacation next year? Or are you in need of putting away your emergency fund somewhere you are sure it will not be lost but will gain more than your savings account? A CD can be perfect for that.
The largest weakness, on the other hand, is liquidity. When your cash is in it is not possible to touch without being punished.
Steps to Open a CD
Okay, let’s get into the “how.” Getting a CD is not that hard, though you will wish to adhere to a few steps to maximize your discount.
1. Choose The Length of Your Money Investment.
There are varying terms in CDs. These are merely the time durations in which your money remains in bondage. The terms may be 3 months up to 5 years. Generally, the longer the term, the higher the interest rate.
Pose a question: When shall I want this money? Should you need it in the near future, select a short-term CD, or a no-penalty CD, where you can withdraw the funds without paying.
2. Shop Around for the Best Rates
Banks do not provide the same CD rates. Online banks have been known to pay very high returns when compared to traditional brick-and-mortar banks at higher rates since the cost of operation is less. As an example, whereas a large national bank can pay only 0.10% APY, some online banks can pay over 4% or higher.
Do not get content with the existing bank you have but compare the rates before making a commitment.
3. Select the Right Bank/ Credit Union.
Other factors, other than rates, include:
- Does the institution have an FDIC or NCUA insurance?
- How much do I need as a deposit? (It takes $500 or even 1,000 to open some CDs, and none to open others.)
- What are the flexibility of their CD options?
The online research comes in here.
4. Apply for the CD
After identifying a bank, it is easy to apply. You can open a CD online at most places, but can also open one at a branch. Some simple information such as your name, address, Social Security number and a valid ID will be required.
5. Fund the CD
You will use a current checking or savings account to transfer money to your CD to activate it. That deposit is locked up during the term. Then, simply sit back and watch the interest grow.
The following are tips to maximize your CD
- A CD Ladder: Take your funds and invest in a few CDs with varying maturity dates rather than just one CD. In this manner, a portion of the money is available sooner and the rest of the money keeps generating higher interest.
- Consider Early Withdrawal Fines: Life is. A no-penalty CD may be a better bet in case you are not certain about whether you can leave your money untouched.
- Reinvest Wisely: The money is not to be left idle when your CD is maturing. Choose to cash or transfer it to a new competitive rate CD.
Final Thoughts
Opened CD is an easy, stress-free method of increasing your savings. It is not about making money fast– it is about having your money make you a safe, predictive, way to make money.
In the event you have some cash not needed in the near future and you like the thought of a certain return, a CD would be the right tool that you were looking to get. Spend time and find the correct term, and secure a rate that will allow your money to grow without worry.
