Certificates of Deposit
Why do I need a Certificate of Deposit?
Certificates of Deposit are a great choice if you have a time-specific savings need or if you just want to diversify overall risk in your portfolio. Among the reasons to consider investing in a Certificate of Deposit are:
- Certificates of Deposit are a safe way for you to earn an excellent return on your investment dollar. With Certificates of Deposit, your investments can easily be converted into cash with relatively lower risks.
- Certificates of Deposit, also known as CDs, offer you a rate of interest higher than a regular savings account.
- CDs feature federal deposit insurance up to $100,000 – an advantage you will not get in other investments.
- You can choose from a variety of CD structures, including non-callable fixed coupon CDs, callable CDs, callable step-rate CDs, and CD ladders to meet your short, intermediate and long-term investment needs.
- Variable rate CDs allow you to make additional deposits during the term.
Are CDs and savings accounts the same thing?
Well, yes to some extent and no as well. Certificates of Deposit are similar to savings accounts as these are insured and virtually risk-free. These are insured by the FDIC for banks or by the National Credit Union Administration (NCUA) for credit unions.
But, CDs are different from savings accounts as they have a fixed interest rate and in particular, a fixed term which may be three months, six months, one year, five years or more. Investors hold their CDs until maturity and during this time, if they wish to withdraw funds, they would have to pay a penalty. Investors should make sure that the money invested in CD is the money they can live without and that the higher interest rate is worth it.
How do CDs work?
The investors put in a fixed amount of money for a fixed period of time while getting a CD and in turn, they are paid interest at regular intervals by the issuing bank. When the CD is redeemed, the investor walks away with the money he or she originally invested plus the accrued interest. Just keep in mind, if the investor redeems the CD before it matures, he or she would be required to pay an ‘early withdrawal’ penalty or forfeit a portion of the interest earned. These penalties ensure that it is generally not in a holder’s best interest to withdraw the money before maturity – unless the holder has another investment with significantly higher return or is in a serious need for the money.
When a CD matures, the holder usually has a window of 10 to 15 days to decide what to do next. The CD might be renewed by the bank, if within this time the holder does not give the bank alternate instructions.