A certificate of deposit is a low-risk investment that serves as a type of savings account, only it has higher interest rates. Before you sign up for a CD, however, there are some questions you need to ask yourself to ensure you’re making a sound investment decision. Answer these five important questions first if you decide to open an account — they’ll help you determine the best type of CD for your financial goals.
1. What Are My CD Investment Goals?
Establishing goals can help you decide if you should open only one CD account or build a CD ladder. Building a CD ladder entails dividing the amount of money you want to invest into equal amounts and buying CDs with different maturity dates.
A ladder will provide you with a steady cash flow because the CDs will mature at different times. For instance, say you have $30,000 you want to invest. You might choose a one-, two- and three-year CD for your ladder and put $10,000 in each.
For example, if you plan to use the funds in a year to buy a home, a single, one-year CD will mature right in time for you to go shopping. If you want to maximize your earnings, however, with an investment vehicle that will continue to earn interest, a CD ladder would be a better choice.
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2. How Much Money Can I Deposit Into a CD?
Think about the total amount of money you can afford to deposit into a CD. Most banks offer higher rates for larger deposits — and longer terms. Remember that the FDIC insures only up to $250,000 per deposit, per institution. If you want to invest more than $250,000, consider opening a few CDs at different banks.
3. Should I Shop Around for CDs?
You should definitely shop around before you choose a CD. Look for the best rate at banks and credit unions you can join.
Often, financial institutions offer promotional rates on CDs so make sure you do your homework. Also check the minimum deposit amount required for the CD and familiarize yourself with its early withdrawal penalties.
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4. Are Current CD Interest Rates Good?
You have to do your research to find the best CD rates. If you open an account while interest rates are high, choose a a long-term CD and if you open one while interest rates are low a short-term CD would be the better choice. In addition, keep in mind that CD rates change fairly often.
If the rates are anticipated to go up during the term of the CD, then a variable-rate CD would be a great option. If the rates are anticipated to go down during the term of the CD, then a fixed-rate CD would be the better choice.
5. Do I Need to Keep Track of the CD Maturity Date?
Mark your CD maturity dates down on a calendar and ensure your contact information is current at your financial institution. You should be proactive and contact your institution when your funds mature.
Otherwise, the grace period might end and your institution will likely roll over your account that is similar to the one that came due. If there is a higher-rate CD available you could miss a good opportunity to reinvest your money yourself. You should also learn how a CD’s maturity date impacts your return on your investment.
Regardless of the CD investment strategy you want to follow, identify your goals before you put your money into this financial product. Additionally, read all the terms carefully — including the CD early withdrawal penalty — before you commit so you’re fully aware of any conditions or restrictions.
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