What is a Certificate of Deposit & Is It Worth Investing In?
Currently, a Certificate of Deposit (CD) is listed among other highly ranked and recommended investments. This is because, for the most part, CDs provide a higher return than a normal savings account. For this reason, most financial institutions have made Certificates of Deposit a staple of their financial product offerings.
How Does It Work?
Simply put, a Certificate of Deposit is a form of trade between you and a bank that depends on the amount of money invested in the bank and the duration of the investment. As a client, you choose the amount of money and period of time the funds will be available for the bank to use based on their CD terms and offerings. In return, the bank offers you a higher annual percentage yield as compared to that of a regular savings account. The bank can provide a higher percentage yield due to the guarantee of having those funds for the specified period of time.
When opening a CD, you are required to select the duration of how long you want the bank to keep your money. The bank usually refers to the period as a term. Most banks offer fixed terms ranging anywhere from 6 months to a year up to even 5 years or 60 months. Usually, the longer the duration of time, the more the interest you can earn.
It is important to note that the terms are fixed but can be broken for a penalty fee. Therefore, it is prudent to stick to the term set to avoid losing interest earned. Once your Certificate of Deposit matures, you are at liberty to decide whether to reinvest or terminate.
There are various reasons for using CDs. An obvious one is to get paid for having extra cash. In this case, you are giving money to a bank in the form of a CD and earn money in the form of interest. Additionally, another reason to use a Certificate of Deposit over a normal account is that the amount of interest accrued and earned will be higher than that of a savings account.
A Certificate of Deposit is not the fastest way of multiplying money; however, the risks are minimal and it is normally a safe investment.