CDs or certificates of deposit provide customers with a different method of saving than a savings account. These times investments require you to deposit a predetermined amount of money into an account for a certain amount of time with an interest rate determined by rises and falls in the current market. At the end of the period, you receive your money and interest back minus an income tax deduction. Selecting the CD that fits your lifestyle can be tricky. Here are four factors to consider when buying your CD.
- Timing – Think about how long you can wait for the investment to mature. Long term CDs can take several years to mature. Short term CDs could take only one month to mature. Usually, the longer you leave the money in the bank, the higher the interest rate will be.
- Amount – How much do you really have available to deposit? A jumbo CD might yield higher interest rates, but they usually require an original $50-100,000 deposit, which many investors cannot afford. However, the larger your investment, the larger your return will become.
- Purpose – Most banks offer special IRA (Individual Retirement Account) CDs which usually have higher interest rates than traditional CDs. Length of a CD term could also be determined by purpose if you have a major event coming up in the future which will require large amounts of funding.
- Risk – CDs require a certain amount of risk-taking, especially the longer you leave them in. Many have penalties for early withdrawals. If you feel worried about being unable to access your money but still want the higher interest rates of CDs, consider a liquid CD which allows some withdrawals without penalty.
