Everything You Need to Know About CDs

As stated, a CD, or certificate of deposit, is a viable way of saving money. Like a traditional savings account that you would establish at a local bank or credit union, a CD is federally insured. Not only does a CD have both a fixed interest rate and maturity date, which indicates when you can withdraw the money. Typically, there aren’t monthly fees attached.

Although your three primary options for saving money (a CD, a traditional savings account and a money market account) serve the same purpose, they work in very different ways. To help you determine if a CD is the best option for your specific needs, compare it with the other two possibilities.

The main advantage of securing a CD is that it has a much higher rate of interest than the other two savings options. Then, with a fixed interest rate, you never have to worry about it changing throughout the life of the CD, and as mentioned, seldom do monthly fees apply. The only real drawback is that if you want to withdraw a portion or all of your money, the financial institution would charge a significant financial penalty.

As for a conventional savings account, there aren’t restrictions as to the number of times you can take money out. Another benefit is that most banks and credit unions have an extremely low balance requirement, some only $5. Along with low or no monthly fees, you receive a card to use at any ATM. While there aren’t a lot of negative aspects of a savings account, some financial institutions have withdrawal limits and don’t pay very high interest.

Compared to standard savings, a money market account generally pays higher interest. This type of savings also acts somewhat like a checking account in that you can use an ATM to make deposits and withdrawals and even write checks against it. The downfall with a money market account is that to avoid monthly fees, you have to maintain a specific balance. The other thing is you have limited withdrawals each month.

Unlike opening a traditional savings account that has virtually no requirements, for a CD, you must meet the financial institution’s criteria. The first step involves choosing a bank or credit union that pays the highest interest and offers the best terms. Once you identify the one you want to do business with, you would either apply for a CD in person or online.

Information required usually includes your full legal name, residential address, your driver’s license number and state and your contact phone number. Depending on the financial institution you select, you may also need to provide an emergency contact, employer contact, and even list one or more beneficiaries. Now, if you opt to submit an application for a CD online, more than likely, you’ll have to provide some additional information.

As part of the application process to open a CD, most financial institutions require a copy of your driver’s license and Social Security card. Before approving you, the bank or credit union will verify that you are who you say. Also, you may or may not have to pay a nominal fee to open a CD, which depends on the financial institution that you select.

The maturity of your CD depends on what you chose when opening the account. For this, you have multiple possibilities, including 21 days, 1 month, 3 months, 6 months, 7 months, 9 months, 12 months, two years, three years, five years, 10 years and even longer. One essential thing to know is that the longer the maturity date of the CD, the more interest and yield it earns. Therefore, if you want the most return on investment possible, you would opt for a 10-year or longer CD.

Once a CD reaches its maturity date, you would either renew it or not. If you plan to open this type of account for the purpose of saving for decades, you might consider going with a financial institution that offers automatic renewal while guaranteeing the highest interest rate available. Otherwise, you would make the decision at the time of maturity.

If you don’t go with an automatic renewal, before locking your money in again, you want to make sure the same bank or credit union still offers the most competitive interest. Otherwise, you could withdraw your money and open a new CD elsewhere. On the date the CD matures, not only do you have full access to the dollar amount you invested but also the interest paid throughout the lifetime of the account.

As you can see, a CD offers a lot of benefits that make it an excellent choice over other savings options. However, always conduct extensive research on different financial institutions to ensure you’re getting the best deal possible. As stated, along with local banks and credit unions are a host of reputable online financial institutions worth consideration.

It’s also imperative that you fully understand your current and future financial needs. Although you can earn significant money on a long-term CD, the last thing you want is to find yourself in a financial situation that would require you to pull the money out early. In that case, you would have to pay a hefty penalty. In fact, along with the fee tacked on by the bank or credit union, you would lose all the interest earned with an early withdrawal.

Rather than an actual savings account, most people view CDs as an investment. Even if you choose a short-term CD, make sure you wouldn’t have any reason to take the money out before the account reaches its maturity date. This is why also maintaining a conventional savings account comes highly recommended. That way, if you have a financial emergency, you have access to the funds needed but without touching your CD.

Finally, if you’re in a position to do so, consider opening more than one CD. An excellent strategy consists of initially opening a 6-month and 1-year CD. Upon maturity, you could use a portion of the money to open two more short-term accounts along with one 5- or 10-year CD that pays a higher rate of interest.

For a more secure financial future, a CD makes perfect sense. This type of account is easy to qualify for, there are few rules to follow, and when choosing the right bank or credit union, you’ll make quite a bit in interest.