Investing in Certificates of Deposits

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When most people think of saving and investing, particularly the older generations, they generally think of Certificates of Deposits (CDs). A Certificate of Deposit is a time deposit commonly offered by banks, credit unions, and savings and loan institutions. Since CDs are insured by the FDIC, just like savings and checking accounts, they are considered a "cash investment," which simply means cash in a CD is like having "cash in the bank."

How CDs Work

Investing in CDs is simple: you pick a maturity, say 6 months, 3 years, or even 5- or 10- years and shop around for the highest rate. Once you've found the best deal, it is a simple application process to open a CD account at your bank of choice. Note that you can't get access to your CD before the maturity date without stiff penalties, so it's best to choose a shorter maturity if you aren't sure when exactly you will need your money.

CD Interest Rates

The range of interest rates offered by Certificates of Deposit usually range between that of savings and money market accounts and that of corporate bonds. CDs are a bit riskier than cash in a savings or checking account since you are locked in for the duration of the contract. If interest rates go up, you can't easily cash out of a CD without paying a penalty. That said, CDs are less risky than most bonds because the principal doesn't fluctuate. And since they are FDIC insured, you don't have to worry about losing money in a CD. A corporate bond, on the other hand, could potentially become worthless if the company declares bankruptcy.

In today's technology-driven world, it is possible to use the internet to find the highest-paying CDs nationwide. Since most banks allow you to do pretty much everything online, there's no reason you couldn't open a CD at a bank halfway across the country.

CD Penalties

Withdrawing funds from a Certificate of Deposit before the maturity date could result in severe penalties, often equal to as much as 10-15% of your accumulated interest to date, not to mention missing out on future interest payments.
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