While the common lingo in banking with which people are familiar doesn’t usually include “CDs,” they are an important financial tool more people should know about. CDs stand for certificates of deposit. They are somewhat similar to a savings account.
In some cases, these instruments can even have higher interest rates. These sound great, and they are, but note that you might not be able to access your cash as easily as you would your average savings account. These certificates also have several other differences than savings accounts that you should know.
Overall, they are pretty stable. They provide the potential to benefit many people. A CD might be right for you, depending on your financial situation and your goals. However, there are instances where you might just want to stick with a regular old savings account.
More About CDs
As mentioned, CDs stand for certificates of deposit. This is like a savings certificate. The bank issues a promissory note, which is a financial contract. The CD gives you a fixed maturity date. A maturity date is where the CD is repaid to you, the depositor. A CD has a fixed interest rate. The rate and maturity date are both specified in the CD. Commercial banks issue certificates of deposit, and the FDIC (Federal Deposit Insurance Corporation) insures the instruments up to $250,000 per person. The National Credit Union Administration (NCUA) also provides insurance for these certificates.
The CD is electronic, which saves a bank the brick-and-mortar costs of setting up a building to do these transactions. But note that a CD will not usually make you a millionaire. A lot of their value is in the financial stability they provide. That’s a reason why the CD has more of an interest increase at the date of maturity than other financial tools.
CDs are beneficial for some people, while others may not want to get one.
Who Should Get a CD?
You may be a great candidate for a CD. The primary benefit a CD incurs is security. It might not make you a million dollars, but it will give you some sort of yield. The insurance on the CD provides this stability. If you have a savings account and want to diversify your savings, a CD is a great way to do that. Or, if you want an alternative to a savings account, a CD can provide that alternate savings route too. Also, if you do not need a lot of liquidity to your money, a CD could be good for you.
Who Should Not Get a CD?
CDs are useful financial instruments, but they have their downsides, as do other financial tools. If you need to withdraw your money right away, a CD is not for you. There is not a lot of liquidity. While the fund is secure, the more money you have in the CD, the later the fixed maturity date. You will not be able to withdraw funds without incurring a penalty. And the penalties can be somewhat steep. Some banks do not penalize you within a certain time frame, but that does not hold true for all financial institutions. Be careful about getting a CD if you need a lot of liquidity. Or, you could use your checking account for withdrawals, have a savings as a backup, and put a small amount in a CD as a backup to the backup.
CDs are not one-size-fits-all. There are different types of certificates. Liquid CDs let you withdraw money, but they do not give you as much of a return as alternatives. If you’re unsure about your finances, but really want to see if this can work for you, a liquid CD might be the tool to do so. Another type of CD is a bump-up CD, which let you apply a higher interest rate to your current CD. There might be a higher minimum deposit with a bump-up. Step-up CDs are a little different. These raise interest rates at regular intervals. IRA CDs, another form of CD, are a retirement tool with low interest rates and a low return. Lastly, another CD form is brokerage CDs. Brokerage accounts sell these with occasionally better rates than banks.
Finally, CD ladders let you maneuver between short- and long-term CDs. When you use a CD ladder, you divide the amount in your CD into multiple CDs. These multiple certificates of deposit can have differing lengths of years to them. When the CDs mature, the bank invests them in one a CD with a five-year term. This combined CD has the highest rate available.
CDs are a useful financial tool for people with certain financial situations and goals. They provide stability, though the cash is not always as accessible. They can have higher interest rates than savings accounts, which is one of the factors that make them attractive. However, there are some people who should stick to a regular savings account for now. Also, interested individuals can look into specialty CDs and more flexible types of CD accounts. Overall, this tool has range and depth. Look into and compare lenders to find the best rates to benefit you.