No, we're not talking about compact discs. Certificates of Deposit, better known as CDs, are one of the most common banking services available. But what exactly are they, and would they make a smart investment for you? It depends.
They are more complicated than a conventional savings account, but they could be worth researching.
Traditional CD rules are very simple: you have a fixed sum of money, with a fixed time frame and fixed interest rates. The customer invests money with a bank for a set time and, upon maturity, receives the interest. Traditional CDs are completely set by the bank and incredibly low risk.
In recent years, banks have introduced CDs with special features like variable interest rates, payouts linked to the stock market and even slightly higher interest rates for the ability to “call” the CD to maturity early. Although these new features make CDs more customizable and in some cases higher-earning, they're still a "pay-in and wait" banking product.
Accordingly, they might not be for everyone.
Even though a certificate of deposit is considered to be one of the safest investments available, consider the following before you sign up.
If you’re looking for an opportunity to invest but aren't sure if a CD is for you, remember that a certificate of deposit is best used for extra funds that you won’t need access to for a while. For example, many service members may decide a CD is the perfect place to hold extraneous funds while on deployment. On the contrary, never put emergency fund money in a CD because gaining access to it before maturity comes at a high price.
NerdWallet conducted a study about a new phenomenon in banking: bonus rate CDs.
According to John Gower from the site, “some bonus-rate CDs, especially short term accounts (under a year), can nearly double the typical yield.”
The best part about getting a bonus rate on your short-term CD is you’ll probably make a higher rate than you would on a 1-2 year deposit without the fear of needing to withdraw early. If investing with a CD interested you but you weren’t sold on the interest rate and term, look for bonus or promotional rate and get more for less.
Before you sign up for a CD be sure that it is from an FDIC insured bank. Although some institutions have high quality websites and seem legitimate, if they aren’t FDIC insured you are at risk of losing your entire investment. These same institutions may try to convince you to sign up with a high interest rate, but remember if it seems too good to be true, its probably a scam or a risky institution.
If you’re looking to use CDs as a long-term investment strategy, split your available amount and invest it in such a way that you will have at least one maturing every year. No matter what your investment strategy, always look into the stipulations for automatic renewal. Don’t let the maturity date pass unnoticed and then get stuck paying a big withdraw fee or waiting another year.
Overall, remember to do your homework. Don't be afraid to take the packet of information home from the bank and read all of the fine print. The more you know, the better off you are, and shopping around can get you higher rates and better options.