Investing in a certificate of deposit is something we have always wondered about but never taken the plunge on. However, we have heard from family members that it is their go-to investment choice.
There are so many options to pick from when looking to invest your money. So, it’s important to consider your risk tolerance and time horizon when making a decision. That’s why we were happy to connect with Andrew from LendEDU who could shed some light on investing in a certificate of deposit with us.
He is here to explain the benefits of investing in a certificate of deposit, how to to tell if it’s the right move for you, and how to get started.
If you have a unique money-related topic to share, reach out to us! We love sharing fellow money nerds’ stories and experiences.
Take it away, Andrew!
Saving money is essential to building wealth and Fueling Your FIRE. Setting aside part of your earnings is instrumental in building wealth, paying for unexpected expenses, buying a home, investing, and more. To say the least, having cash on hand is important and so is putting it into a savings account to earn interest.
When talking about saving money, a standard savings account may be the first thing that comes to mind, but it’s not the only way – or the best way – to save money. There are actually several different types of accounts that help you save more, such as high-interest savings accounts, money market accounts, etc. Some accounts may offer more interest on your savings compared to a traditional savings account. One such account happens to be a certificate of deposit (CD).
A certificate of deposit, or CD, is a type of savings account with a special set of rules. They can help you save more money long-term, but you should also have an understanding of the stipulations associated with CDs in order to figure out whether they’ll help you reach your long-term savings goals.
Certificate of Deposit Basics
A certificate of deposit is a longer-term savings vehicle with unique features that are guaranteed by banks and credit unions.
When you establish a certificate, you deposit a set amount of money into an account and agree to leave the funds in the account for a set period of time. The term can be anywhere from 3 months to over a decade. In most cases, you cannot withdraw the funds without a fee until the CD has reached maturity, which is the end of the term originally agreed upon.
The bank or credit union offers a fixed interest rate on the account. Generally, CDs with longer terms offer higher interest yields, and the yield on a CD is typically higher than a traditional savings account. In short, you deposit for the long haul, let it sit, and should expect a decent return on your savings.
How to Know if a CD is the Right Move
For someone with a lot of idle cash, it may be worth switching accounts for a better yield on savings. As mentioned, many traditional savings accounts only offer minimal interest monthly or annually. CDs are known for providing higher interest rates as a long-term savings investment vehicle.
Certificates can help build wealth at a greater pace, and they offer even greater yields for either depositing more money or settling for a longer maturity term. If you want to keep a large chunk of cash safe for an extended period, then a CD is the way to go. Additionally, if you want to passively increase the value of your money, then go with a CD.
Although CDs offer better interest yields, they also have downsides. CDs are less flexible than traditional savings. You cannot touch your money during the maturity period without incurring a fee. Dipping into your CD before the maturity date will cost you in both fees and a loss of interest.
Another drawback is that interest rates are fixed to the time you establish the CD. You can leave money on the table if you open one in a low-rate environment only to see rates increase down the road. On the flip side, opening an account in a high-rate environment would be an ideal time to invest in a certificate of deposit.
How to Get Started
If you decide that opening a certificate of deposit is the right move for you, here are some basic steps to take:
- Compare current CD rates from different banks and credit unions. CD rates and terms vary significantly from one institution to the next, so shop around if you want to find the best deal.
- Decide on the term you want for your certificate. Be sure to think about your needs in the future, and select a maturity period for your certificate that makes sense.
- Check the minimum deposit amount. Financial institutions require a minimum deposit for starting a CD. Needless to say, you need to actually have the money if you want to deposit the money.
- Fill out an application with the bank and credit union of your choice. This can be as simple as a few questions either online or in-person, but either way, get into contact with the account provider and ask about an application.
- Fund your certificate with available savings. Most financial institutions allow you to make a transfer or deposit a check or cash to start your CD. Track the progress of your savings and yields!
- Remember your maturity date. Once your certificate term comes to an end, be sure to make a decision on whether to roll it over into another CD or to withdraw the cash. Most financial institutions give you 30 days to make a decision before automatically rolling it into a new certificate for you.
The Bottom Line
A certificate of deposit can be a great way to make your money work harder for you. Before opening your next CD, be sure to shop around for available rates, account minimums, and terms. Prepare yourself to leave the money in the account until the maturity date, and don’t be afraid to explore other options if a CD doesn’t sound right for you!
Courtesy of Andrew from LendEdu
Samantha uses her BS in Finance and MBA to help others get control of their finances through budgeting, saving, investing, side hustles, and travel hacking. Due to following the FIRE Movement’s principles, she was able to quit her high-stress job in the financial services industry in July 2019 to pursue her side hustles. She is now a full-time entrepreneur and blogger. When not working, she enjoys spending time with her dog “Simba” and traveling with her husband, John.