(ProsperNews.net) – Certificates of deposit (CD) let you save while still earning. The savings vehicle offers higher interest rates than regular savings accounts. In addition, the Federal Deposit Insurance Corporation (FDIC) insures your deposit.
What are CDs?
A CD is a savings vehicle where you deposit a lump sum for a specified period. Unlike a regular account, you must leave the money untouched throughout the savings period. With CDs, the FDIC protects your deposit of up to $250,000. As such, you lose nothing even if your banking institution goes bankrupt or ceases operations for any reason.
There are more than five types of CDs, each with unique benefits. They include:
- Liquid CDs. Liquid CDs work differently than regular CDs. The liquid certificates of deposit allow you to withdraw without penalty.
- Bump-up CDs. Bump-up CDs offer a one-time opportunity to negotiate higher interest rates. Typically, you can request the increase when market interest rates rise above what your bank initially provided.
- Step-up CDs. With step-up CDs, your financial institution increases your interest rates regularly during the savings period.
- Jumbo CDs. A jumbo CD requires a higher deposit than regular CDs. In return, your financial institution provides a higher interest rate than other CDs.
- Brokered CD. A brokered CD is sold through a brokerage firm, not through your financial institution. Brokerage firms allow you to compare interest rates from different banks before choosing the ideal one.
How Do CDs Work?
CDs work like ordinary savings accounts. First, you open a CD account at your favorite credit union or bank. Since interest rates on CDs vary from provider to provider, you should find a bank with the most favorable interest rates.
Once you buy CDs, you deposit a lump sum for a specified period. Note that your financial service provider expects you to leave the savings intact for the chosen period. Otherwise, your bank will penalize you for withdrawing.
After the savings phase elapses, your financial provider allows you to withdraw the principal amount plus the interest. Alternatively, you can transfer the amount saved to a new CD account with a new term and interest rate.
Why Are CDs a Good Investment?
Saving your money in a certificate of deposit has many advantages. For one, the FDIC protects your deposit against unforeseen economic problems. So if your financial provider goes bankrupt, you still get your saved money plus the interest earned. Other benefits of a certificate of deposit include:
High-interest Rates
CDs offer higher rates than ordinary savings accounts. Saving your money on CDs helps you stash cash for rainy days while earning interest. With CDs, your money can gain value at a rate of up to 5% per year.
Improves Your Saving Habits
A CD promotes good savings habits by limiting withdrawals during the life of the CD. Limiting withdrawals helps you avoid tapping into your savings in the event of insignificant financial needs. As a result, with CDs you are likely to achieve your savings goals with ease.
Guaranteed Returns
When you buy a CD, you are guaranteed to receive interest and your principal. With this guarantee, investing your money in CD is an excellent way to earn a return without getting involved in risky investments.
The Bottom Line
CDs are a great way to get maximum value from your savings. These savings instruments offer higher interest rates, which means you will earn more. In addition, the FDIC insures deposits of up to $250,000. With these savings vehicles, you’ll enjoy peace of mind knowing your hard earned money is safe.
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