Certificates of deposit are offered at almost every banking institution in the world, yet many people know little about them. They are often seen as a waste of money and time, but for anyone with a little extra cash lying around they can be a great way to make money off interest.
So What Exactly is a Certificate of Deposit?
A Certificate of Deposit, or CD, is a financial instrument that is a mix between a savings account and an investment. Generally, the investor will give the money to a bank or financial institution in exchange for an interest rate, so it works very much like a normal savings account. The catch is that the investor cannot take the money back for a certain amount of time.
In exchange for this illiquidity, the bank or financial institution offers a premium interest rate that is higher than anything you can earn on a normal savings account. This is why CDs can be extremely valuable for those who don’t want to risk their money in the stock market, but do not want to have their money sitting and earning less than half a percent in interest from a normal savings account.
What Should You Expect with the Interest Rate?
One of the best features of CDs is they offer premium interest rates. In exchange for holding your money for up to five or ten years, the bank will give you an interest rate much higher than you will find on any other financial instrument. You do need to be aware, however, that the longer you keep your money in a CD, the higher the chance that the interest rate will climb. Since you cannot change the interest rate on your CD, you may be losing out on that extra interest growth.
On the other hand, if the interest rate goes down, much like it did in 2008 and 2009, you are still earning the interest rate that you signed on for when you bought the CD. In 2010, those who had bought CDs in 2006 and 2007 were making 8 and 9 percent on their CDs, while everyone else was stuck with less than 1 percent on their investments.
Right now, interest rates are fairly low, but they are climbing. A good interest rate on a CD depends upon which institution you go to and how long you want the CD. The longer you hold the CD, the higher the interest rate you are offered can be since the bank is keeping your money for longer. Some good rates available right now are 0.30 percent on a 6 month CD, 0.40 percent on a 12 month CD, and upwards of 1.75 percent on a 60 month CD. You should also consider the institution you are investing at as well, since some banks allow you to switch your interest rate once a year if the interest rate rises while your CD is still in the bank. CDs are a good way to make a slight profit off the savings you don’t need access to.
