There are several different types of investment and savings instruments offered at banks and other financial institutions these days. Many of them offer an interest rate or some kind of incentive, such as dividends and potential growth earnings, in exchange for temporarily giving up your hard earned money. One such savings instrument is a Certificate of Deposit (CD).
How Does It Work?
A CD is an instrument that allows you to deposit a certain amount of predetermined money into an account. This account will not allow for any withdrawals or deposits until the term of the CD is up. In exchange for having money tied-up at a bank for this long, the investor gets a premium rate of interest, often much higher than what is earned on a money market or savings account, in return. The principal and the earned interest are received at the end of the term.
How Do You Pick a Bank?
The first step in the process of getting a CD is researching where the best terms and interest rates are. Banks all have different rates and terms, and they are all competing for your money. Some banks have CDs that allow you to make a deposit during the term. Others allow you to change your rate of interest once a year for the term or withdraw a portion of your CD with no penalty once a year. Taking all of these aspects into account and integrating them with your needs is the crucial first step in finding what you need.
What About the Interest Rate?
Once you find the CD that you want, you simply go to the bank and request to open an account. Once your CD is opened you almost immediately start earning your interest, usually on a monthly basis. CDs are often offered for terms ranging from 3 months to 72 months, sometimes in 3 or 6 month increments. There are also some that allow you to add money to your CD through a deposit process. Interest rates for these types of CDs with perks tend to be much lower than a normal CD, but still higher than a savings or money market account. Currently, the rates of interest offered on CDs range from 0.30 percent for a 3 month CD to upwards of 1.75 percent for a 60 month CD.
CDs can be very useful financial instruments for anyone looking to invest their money in something other than a money market or savings account. These instruments also offer much higher interest rates, although you lose your ability to spend that money during the length of the term. When all is said and done however, you’ve made a profit at the end of the CD term.
