Investing in certificates of deposit, more commonly known as CDs, is a safe way for depositors to make a little extra money in interest. When putting your money into a CD, there are a few questions you should ask yourself to ensure you make the best CD investment decision.
CD Investment Strategies: 5 Questions to Ask
1. How soon will I need the money? Selecting the right term length means you’ll earn interest without worrying about losing access to money you need, or paying early withdrawal fees if you have to pull out your money prior to the CD account’s maturity date. How quickly will you need to use the money you’re depositing? If it’s not for a while, it’s wise to choose a longer-term CD. Typically, the longer the investment period, the higher the interest rate generated.
2. Will I remember the maturity date? Mark the CD maturity date down on a calendar. If you do not remember to contact your bank and request the matured funds during your CD’s grace period, the bank might just roll the funds over into a new CD of equal terms, even if there are higher rate options available at the time.
3. How much money do I have to deposit? Think about the total size of your savings that you plan to deposit in a CD. Some banks and credit unions offer higher rates for larger deposits. Keep in mind, however, that the FDIC and NCUA only insure up to $250,000 per depositor, per institution. If you have more than $250,000 to deposit, choose more than one bank to spread your funds across.
4. What are my savings goals? The reason you are saving this money will impact what type of CD you should choose. If you are investing for retirement, you might want to set up a CD that rolls your interest into a separate retirement savings account. However, if you are simply interested in growing your long-term savings, a CD with compounding interest is likely a better choice.
5. Are interest rates ideal? Interest rates on deposit accounts, including CDs, can fluctuate. If rates are high, locking in a competitive rate with a long-term CD will help you keep earning even if rates go down. On the other hand, if interest rates are falling, you might want to stick with a short-term account so your money isn’t locked up should CD rates begin climbing again.
Regardless of the CD investment strategy you follow, it’s important to identify your goals before depositing your money in a CD. Additionally, research all the terms of your CD investment before committing so you are fully aware of the conditions and restrictions.