Tips for Certificates of Deposit Savers?

Answer 1

Certificates of deposit, often referred to as CDs, are investments that are considerably low-risk. A certificate of deposit is an investment made with a bank, savings institution, or credit union. CDs typically provide a higher interest rate than a typical savings account. Certificates of deposits are Federal Deposit Insurance Corporation (FDIC) insured up to $250,000.

Certificates of deposit are issued with varying maturity dates, including six months, one year or longer. You deposit a fixed amount of money and in return your CD accrues interest. At maturity, the bank pays you your initial investment plus the accrued interest. You can redeem your money before maturity date, but if you do you may be subject to an "early withdrawal penalty". Other CD terms allow the investor to redeem his initial investment, but must forfeit his accrued interest. Most investors purchase their certificates of deposit through their bank or credit union, but brokerage firms now offer CDs as well. At times, brokerage firms offering CDs can offer a slightly higher interest rate by supplying a specified amount of funds to the institution issuing the certificate of deposit.

The FDIC warns that consumers should be wary of CD rates that are advertised well above the average CD rate. In some cases, the CD may not be federally insured. On the other hand, there may be additional terms and restrictions such as the advertised rate only being applied to the first $1,000 that the consumer should be aware of. Many consumers feel that it is a good idea to "ladder" their certificates of deposit. For example, if a consumer has $60,000 to invest, they may invest $20,000 in a one year CD, another $20,000 in a two-year CD and the last $20,000 in a five-year CD. If all goes as planned, this may make sense. But if an emergency comes up and the consumer needs all of this money, he may be subject to early withdrawal penalties, reports the FDIC. It's also important to find about the certificates of deposit maturity terms. Does the certificate of deposit automatically renew at maturity? If so, does it renew at the original CD rate or the market rate? If the market rate is low, you may not want to renew this CD.

The bottom line is that certificates of deposit are virtually low-risk investments that offer a relatively safe and steady savings opportunity. However, penalties may be incurred for early withdrawal.