Investing in CDs is an excellent way to save your hard-earned cash. They are not only secure but will earn you solid returns on investment. Short-term CDs are not known to earn the highest yields.
However, you’ll earn more than what you’d get on traditional savings accounts or in the money market. CD rates were especially disrupted after the 2020 federal cut. However, they are still a worthy investment.
With just a low level of commitment, you’ll watch your money grow. If you have short-term goals, 3-months, 6-months or 1-year terms will serve you right. In this article, we’ll explore these options and point you to the right institutions.
Certificate of Deposits (CD) work like traditional savings accounts. They allow users to save money for a defined period. However, unlike traditional savings accounts, CDs come with fixed returns upon maturity of a term.
You allow a bank to lock your money for a period between one month and 10 years, or more. All this while, your money will attract interests as per the earlier agreed-on rates.
How much you’ll earn at the end of your term depends on many factors, but most importantly, how long you keep your money saved on CDs. Longer CD terms tend to attract higher rates.
However, you must be able to leave your savings untouched throughout the earlier agreed term. As such, before committing to a term, be sure you can stay disciplined and committed throughout without breaking the terms of the agreement.
During the term of your CD, you’re also guaranteed the safety of your money. They are federally-insured, up to $250,000 in individual accounts. And, the National Credit Union Administration (NCUA) insures client money in credit unions, while the FDIC does so in banks.
Your principal amount plays a major role during the calculation of your possible yield. But apart from that, your financial institution will also consider the market average.
Once they have the two, banks and credit unions multiply them by each other to work out your rates. You’ll then be paid your earned interests together with the principal amount at the end of your term.
Remember to check what rates an institution offers by looking at its Annual Percentage Yield (APY).
Interests are worked out daily, weekly, quarterly, semi-annually, and annually. This varies from one institution to another.
However, remember, frequent calculation of interests means more income. As such, prioritize institutions compounding interests daily.
Please note that you start earning interest right from the first day you invest in CDs. This, therefore, maximizes your possible earnings.
For CD terms, savers can choose between short, medium, and long-term CDs depending on their financial goals. Short-term CDs range from 3 to 12 months, medium CDs from 2 to 4 years while long-term CDs from 5 to 10 years, or more.
Those looking to invest in short-term CDs need a lower commitment level and discipline since their money takes a short time to mature.
Financial institutions charge early withdrawal penalties. The thought of paying these fees is enough to keep you on track. And you’ll easily forgo the thought of withdrawing your money before maturity.
But, if you feel you may not be able to keep it to the end of the term, consider going for no-penalty CDs.
Savers who go for short-term CDs do so because they have short-term goals. That could be buying house appliances, financing home improvements, or a new business. The bottom line is – the length of your financial goal should dictate the CD term you choose.
This then should lead you to the next crucial thing – projected interests. Check out what an institution offers before committing. Remember, the goal is to maximize your earnings.
You also want to exercise caution when deciding your principal amount. Typical CDs lock your savings such that you won’t be able to withdraw or save more before the maturity of your term. Ensure you maximize your initial principal amount.
Alternatively, you can also choose to go for add-on CDs. These allow continuous deposits throughout your term. Most online banks offer such CDs. Prioritize such banks and enquire about any possible restrictions they might impose on you.
If you have trouble choosing the right CDs, it’s advisable to seek financial help from professionals. The institution you wish to save with will also likely do a good job educating you on the available options based on your financial goals.
Once you’ve gone through the above stages of choosing the right CD terms above, it’s now time to make an actual choice.
To do that, you’ll need to take note of a few things. The first is your financial needs. if you need the money in a short period, then short-term CDs will serve you right. You can also go for these if the current market average returns are on the rise.
Another reason savers consider short-term CDs is their penalties. Short-term CDs have lower early-withdrawal penalties than their long-term counterparts.
If short-term CDs don’t sound like what you need, then you could consider long-term CDs. They have a maturity period of 5 to 10 years.
They attract the highest interest in the market and are an excellent choice for those seeking significant financial growth. The high rates are a reward for trusting financial institutions with your money for such a long time.
Long-term CDs also carry the highest early-withdrawal fees, usually a few months’ worths of interests. If anything, this should motivate you to stay disciplined and committed to the end of the term. But, if you feel you can’t, then it’s advisable to avoid long-term CDs.
So, which one should you choose, long-term or short-term CDS?
Go for long-term CDs if you have long-term financial goals like saving for your retirement, buying a home, or starting a business. If you leave it to maturity, your principal amount will earn significant yields.
Short-term CDs, on the other hand, first will be an excellent choice if you’re looking to keep your money locked for a short time.
They’ll also help you take advantage of a rise in the market rates. And, they will attract lower penalties if you are afraid that you could give in to the temptation of withdrawing before maturity.
But, even better, you can invest in both short and long-term CDs. Saving on multiple CDs with different maturity dates is otherwise called CD laddering. Having such will see having your money mature in different times.
This helps you to better take care of your needs. However, remember, you shouldn’t invest money meant for emergencies and daily needs on CDs.
Further note that your proceeds from CDs are subject to tax upon expiry of your term.
Guaranteed returns – CDs, unlike stock, and other financial markets have guaranteed returns. Your principal amount must earn interests regardless of the market conditions such as a fall in the national average. Your expected yields are predetermined at the onset of your agreement and will be paid in full upon maturity of the term and full compliance with the terms of the agreement.
Low yields – CDs, especially short-term CDs, tend to attract lower yields compared to stocks and other financial instruments in the money market. During the sudden increase in the market rates, trading in stocks, for instance, will give you higher returns than CDs would.
Guaranteed safety – Money invested is safe and won’t be affected by any organizational changes. Like restructuring. Your funds are federally insured through the National Credit Union Administration (NCUA) (Credit Unions) and FDIC (banks). The federal government, through these bodies, insures up to $250,000 in every individual account. So, if you have a principal amount exceeding the insurable amount, you’re advised to invest it on different CD accounts with different terms.
Penalties – You’ll be charged some penalties when you withdraw before the maturity of your term. This, therefore, makes CDs inefficient when it comes to taking care of emergency cash needs. And, even worse, early withdrawal penalties reduce your potential earnings.
An excellent savings plan – Investing in CDs is an excellent way to not only save money but ensure its growth, too. This is unlike traditional savings accounts that are more on helping you save your money instead of growing it.
Since CD rates are locked, you’ll miss out on a possible rise in the market rates. This makes stocks and bonds a better investment choice compared to CDs.
Locked returns – CD returns are worked out based on the present market conditions when investing. Your savings then remain locked at this retain throughout the term. That, therefore, makes you immune to a possible downward trend in the market rates.
Traditional savings accounts and CD accounts all follow the same procedure during application. They also ask for the same requirements.
The procedure is simple and only takes a couple of minutes. But first, you’ll have to source for a financial institution with friendly policies and ones that align themselves with your savings goals. Banks, especially online banks and credit unions are an excellent choice.
Once you find one, you’ll submit a formal application. This entails filling out a simple application form. Here, the bank or credit union will ask for such details as your official names, legal age, permanent address, marital status, and your chosen next of kin.
You’ll also be asked the source of your income.
Remember, the basic requirements are that you must have attained the age of majority – 18 in most states – and are a legal resident in the United States.
To verify if the details are true, the financial institution will ask for your national ID, valid driving license, or passport. Supporting documents such as your payslips or tax returns records can also come in handy when proving the source of your income.
If you meet all the requirements, your institution will then open for you a CD account of your preferred term.
Remember, saving on CDs should be a well-thought-out venture. Ensure you’re familiar with all the terms and conditions of the financial institution you choose. That’ll help you avoid misunderstandings and the possibility of making mistakes.
Also, be on the watch out for incentives offered by different institutions and special CDs such as add-on CDs and zero-penalty CDs.
Yes. Short-term CDs have become a worthy savings plan since the March 2020 federal cut. With these, you can easily take advantage of an increase in rates and invest. As long as your money stays untouched for the entire term, your principal amount will yield good rates.
Yes. The federal government through the National Credit Union Administration and the FDIC insures up to $250,000 in individual accounts in banks and credit unions against institutional flaws.
When you have the money you don’t intend to touch for 3 or 6 months, basically any term offered by a financial institution that’s less than a year. Withdrawing before the maturity of the term will cost in terms of penalties.
What you choose between the two depends on how much risk you’re willing to take. Investments accounts tend to have higher yields than CDs. CDs, on the other hand, guarantees your returns since they are federally-insured. Investment accounts are riskier since they are not insured.
If you’re looking for higher rates, then CDs are an excellent choice. However, high-yield accounts will give you access to your money and a higher level of flexibility.