Deposit Certificates
Deposit Certificates
For investors who prefer to keep their money in a more stable environment, certificates of deposit (CDs) are a solid option. Your certificate of deposit (CD) can be federally insured, just like a savings account, making it a very secure investment option. Their interest rate is usually higher than that of a savings account.
You get to choose the duration of the term when you buy a CD. Any length from a few months to a decade or more is at your fingertips. Interest rates can be either fixed or variable, but the former is typically better suited to larger deposits and longer terms.
Obtaining written confirmation of the maturity date is crucial. By doing so, you can avoid any unintentional (or not-so-intentional) miscommunication once your CD matures.
Your money will earn more interest in a certificate of deposit (CD) than in a standard savings account since the bank is effectively "borrowing" it to lend to other customers. For the bank, that's the key to profitability. Mortgage and auto loan lenders take advantage of your willingness to part with your cash by lending it to borrowers and then paying you back, in part, with interest. Your agreement to let them utilize your funds for the duration of your CD allows them to estimate their expected earnings and then charge you an interest rate according to that amount.
This is why there are substantial penalties for taking money out of your CD before it matures. Neither you nor the bank will benefit from the inability to use your funds for the longer duration that was first intended.
Your financial institution will send you a letter to notify you of your CD's impending maturity date and request that you inform them of your desired course of action. There will be no penalty to withdraw the funds at this point, or you can transfer them to another certificate of deposit or invest them in anything else.
You may be given the choice to specify the method of interest payment when you initially enroll for your CD. It is common to be able to have it paid to you on a monthly or semiannual basis. Keep in mind that taking interest payments from your CD during its duration will probably reduce your return on investment. Why? Reason being, interest will continue to grow if left in the account. You will earn less money if you take it out since you are eliminating the compounding effect. You can't back out once you've signed up, so be sure to inquire about your alternatives then.
A certificate of deposit (COD) is a safe and sound investment option for many people. But there is some danger; ignorance is the greatest threat. Make sure you have all of your questions answered, including the ones I've already mentioned, before you put your pen to paper.
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