Guest Post – The ABCs of Choosing CDs

(It’s often easy, when you spend so much time looking at stocks, bonds, mutual funds, and even more complex investments, to forget that you need to keep some of your money in safe, easy to understand, not at all complex ways to save money.  One of the most commonly mentioned types are CDs, but what do you really know about them?  To learn more, be sure to read the following article from Jane Brown.)

The ABCs of Choosing CDs

There are two kinds of people: savers and spenders. Spenders are characterized as spending everything they have on present commodities, while savers are much more interested in investing and saving what they have in order to reap the benefits that financial institutions supply the American public.

If you consider yourself a saver and are looking for low-risk investment opportunities, there are several paths you could take, including whether it’s investing in the private, public or government sector. Your best bet for a secured investment would probably be the government sector.

Many Americans turn to Certificates of Deposit (CDs) for an investment that is not only federally insured, but almost a guarantee to generate future profit, most having a high interest rate. By definition, CDs are time deposits, or fixed-time investments, with fixed interest rates that can be found in thrifts, banks and credit unions. Unlike many other federal investments, CDs are insured up to $250,000 by both the FDIC and NCUA. Most of the highest CD rates available are usually found in credit unions and private institutions like Discover Bank.

Most financial institutions offer a variety of CDs, each with different times of maturation (fixed-terms) and interest levels. Because there’s such a wide variety of CDs, many people have a hard time choosing the right one for them. Before you purchase a CD, make sure you understand all the terms and the disclosure statement you’re agreeing to. Here are a few tips that can help you pick the right CD for you.

Consider Your Financial Goals

Before you make any major decisions, step back and look at your present, financial situation. You have to be able to map out your goals and understand your risk tolerance. Remember that CDs are cash equivalents, that means that they are subject to inflation risks. Nevertheless, investing in a CD is relatively safe and will add diversity to your investment portfolio.

Know When Your CD Matures

As mentioned, CDs have different dates of maturation. Some that have a longer date of maturation usually yield higher interest rates than simple, 3-month term CDs. When looking through CDs, make sure understand when your CD of interest matures. Many fail to grasp the importance of tying their funds to long-term investments like CDs.

Don’t be dazzled by high interest rates; consider the pros and cons of investing in a high interest rate with longer maturation or a slightly lower interest rate with a shorter term. It may even be more financially beneficial to choose a short term CD, but make sure to consider your financial goals.

Calling Features

Calling features in CDs give banks the right to terminate, or “call”, a CD after a specific time. The bank’s decision is tied with falling interest rates. For example, if they fall, the bank may not be able to pay your interest, and can, therefore, call your investment. Although savers get back their full amount as well as whatever else was generated, it could be a hassle to look for another CD with a similar interest rate.

Confirmations

Once you know what kind of CD you want, it’s extremely important to confirm your interest rate, date of maturation and how you’ll be paid be back. Usually, when you buy a CD, savers are issued a disclosure document with all the information you need, but some information could be excluded, such as how often a bank will pay interest (i.e. monthly, semi-annually) or how you will receive your returned investment, which could be cash, check or money transfer. It never hurts to be too specific, especially when dealing with CDs. Make sure you have everything in writing.

Ask Whether Interest Rates Change

Although most CDs have fixed interest rates, there are some that have variable rates. If you do purchase one of the latter, be sure you understand when interest rates change and how. Some CDs with variable rates have a slightly different structure than fixed-rate CDs, such as “multi-step” and “bonus rates” structures in which rates shift according to a pre-set schedule. It important to know all the variables involved so you can get the highest CD rates possible.

Penalties

When you’re taking out a CD, one of the most important things you should know is the penalty for early withdrawal. If you need your money back before it reaches maturation on a CD, you almost definitely will have to pay a fee.

Buying a CD requires a lot of forethought, planning and financial strategizing. However, the benefits are endless, and it’s one of the most secured government investments in the market. If you’re looking for a low-risk investment, high reward investment, a certificate of deposit could be just what you’re looking for.

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