This article talks about everything you need to know about CDs with a 13-month term length. Here, we explain how rates differ with this type of CD and what its advantages and disadvantages are for you as an investor. We also laid out the general requirements for opening a CD account to help you get started.
A Certificate of Deposit or CD is a savings product that locks in your funds over a period of time with a bank or a credit union. In turn, you receive interest payments for keeping your cash stored away. As investments, CDs are often considered safe because depositor accounts are covered by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA). This includes the entire principal and any accrued interest, provided that both are within the insurance limit.
Investors utilize CDs for various purposes, but the most common one is to have a vehicle where certain funds set aside for a future expenditure can earn income.
CDs use the compounding formula for calculating the interest payments you’ll receive from your deposit. This means that each subsequent payment is based on the principal plus all the accumulated interest earnings. So, even though the rates stay the same throughout your CD’s term, you’ll receive a higher amount each time it’s due for interest payments.
This is the formula CDs follow:
Final Amount = Principal (1+Rate) Term
For example, if you invested $100,000 in a CD for three years with a 2% rate, you would have $106,120.80 when you reach the end of your CD’s term.
$106,120.80 = $100,000(1+.02)^3
In choosing the right CD rates, you must be clear with your objectives and purpose. For instance, do you have some money saved for a planned expense and would like it to generate returns in its idle time? Or, do you intend to diversify to an investment vehicle that provides a sort of safety net for your portfolio?
When you know your purpose in investing in a CD, the next step is to estimate how long till you need your funds back. This adds more clarity to your objectives by attaching a time-bound component. A preset time helps you decide on the appropriate term length, which is tied to the rates you’ll eventually get.
Once you’re clear with everything, the last step is to consider your CD options and understand the factors that affect rates. This will help you select the CD with the best rate and one that satisfies your objectives.
Here are just some of those factors:
As mentioned, CD term lengths also affect rates, and the longer you keep your funds in a CD, the higher rates you can possibly get. Below we compare the key aspects of a short-term and long-term CD to help you discern between the two and ultimately select one that suits your objectives.
For a short-term CD, you have to remember that it differs from a long-term CD by the specific months you keep your funds stored away until the maturity date. A short-term CD will typically have a term length of less than a year, with the shortest one being 1 to 3 months.
For comparison, the national average rate for a 3-month term non-jumbo CD is 0.07% (as of February 2021) and 0.15% for a one-year CD.
CDs like this would be best for purposes like weddings, vacation trips, or any other expense happening within the next few months. It’s one way to generate a small return temporarily while you wait for the event.
On the other hand, the term length is sometimes considered long-term if it’s over three years, while between 1 to 3 years is medium-term. Still, both are broadly categorized as long-term, as long as it exceeds 12 months.
The current national rate for a 60-month non-jumbo CD is 0.31%.
A CD like this is ideal for setting aside some saved funds to provide for a likely future expense such as tuition fees for college or even as another retirement cash source.
Now, after you’ve clarified your objectives and decided that a 13-month CD is what you should go for, you should first be aware of the advantages and disadvantages of this particular term-length before you commit your funds to it.
A higher rate compared to under 12 months. When the term exceeds the 12-month mark, you lock in your funds for a higher rate than you would otherwise get with a short-term CD. This allows your funds to compound either daily or monthly for a slightly better return upon maturity.
Low Rates. However, despite better returns than CDs with less than a year from their maturity date, CDs still offer one of the lowest rates available when contrasted with other investments.
Brief duration. The term of 13 months is not too long for any investment. In just over a year, you'd get your funds back without a fee, which then allows you to pursue other investment vehicles that offer a more attractive return.
Early Withdrawal Penalties. Now, this could only be a disadvantage if you suddenly misplan your finances and you actually need immediate cash within the next few months. Therefore, if you were to take out the funds you have in a CD, you would need to pay a fine, and this will eat away at your returns.
Better return than a savings account. The same amount you put in a savings account can't be compared to what you'll eventually get with a CD. CD rates will always yield a far better return than savings accounts.
The exact requirements to open a CD account vary by the institution offering the product, but it would normally consist of the following:
ID Proof: The issuing bank or credit institution may ask for a copy of your ID, which can be your passport or driver’s license. And apart from that, you may also need to provide your social security number to verify and set up your account.
CD Application: Since the process is similar to opening a bank account, banks or credit institutions would also need you to accomplish an application form. The form would typically ask for your name, address, phone number, emergency contacts, and other personal details. It may also require that you disclose beneficiaries and employment information.
Deposit Amount and Fees: Once everything is set up, the last requirement is you choose your CD type and term and then make the deposit. In some institutions, there is a fee upfront for opening your account, so you have to check with them beforehand.
CDs can be a great vehicle to earn higher rates compared to something like a savings account. The returns also compound, which may provide you with higher returns until maturity compared to a bond with the same rate.
CDs are considered safe because of the FDIC or NCUA insurance covering your deposit if the issuing bank or credit union closes for any reason.
There is usually a fee for withdrawing the funds you’ve kept in a CD ahead of its maturity date. And the exact amount depends on several factors, which may include the CD term and the issuing bank or credit institution.
A no-penalty certificate of deposit is available to those who prefer to have immediate access to their funds whenever they need it. However, most institutions that offer this may require you to take out the entire invested sum instead of enabling you to make partial withdrawals.
The deposit amounts for a CD are as flexible as the available term lengths. Therefore, even if your investment amount is only $100, you’ll find that banks and credit institutions are ready to offer you the most suitable CD type.