A certificate of deposit (CD) is available for individuals of all ages who are looking for a low-risk investment which earns higher than average returns. The one caveat with this type of account is that you cannot withdraw funds before a predetermined date, usually anywhere from 6 months to a few years. For this reason, CDs offer higher returns than more traditional options like money market and savings accounts.
Compare APYs Across the Board
The first step to take after you've decided to invest your money in a CD is to take a look at the annual percentage yields (APYs) across the board. A significant advantage with any interest bearing account is that banks will often compete with one another to offer the most competitive options. Inquire whether you're bank of choice will match the CD rates offered by a competitor. For example, Ally Bank has a 10-day Best Rate Guarantee which ensures that you're getting the best possible rate available. What's more, explore the services that come along with the account like automatic renewals, flexible yields, and interest compounded daily.
The best place to inquire about a provider's yield is with the company directly. While you may see some review sites comparing one provider's yield with another, they are often not up-to-date. Conversely, APYs frequently fluctuate with little notice so it's in your best interest to contact them firsthand.
Selecting the Length of the Term
The next factor you'll need to consider is the length of time you want your funds tied up for. Keep in mind that the longer you invest the funds, the higher your return will be.
Are you transferring funds from another account to open the CD? If you are it's crucial to evaluate the amount you'll have left over. Experts agree that you should have enough money in an emergency account to cover anywhere from nine months to one year of living expenses. The previous rule of thumb was three to six months' worth, but as economic conditions have shifted so have these suggestions.
To better assist you in building this emergency egg, you should put aside at least 10 percent of your paycheck each month. By consistently making small contributions you'll be better prepared for a worst-case scenario.
Avoid Early Withdrawals
Early withdrawal and penalty fees are quite common when you open a CD. For that reason, avoid withdrawing the funds before it matures. Of course this is a better option than taking out a loan or burying yourself deeper in debt, but just be aware that you risk being penalized for doing so.
Is it FDIC Insured?
The final point to keep in mind is to open an account with a company that's FDIC insured. What exactly does this mean though? The Federal Deposit Insurance Corporate insures traditional bank accounts including checking, savings, and certificates of deposit for the legal limit of $250,000. In the event that the institution goes belly up, the U.S government will reimburse your funds up to the aforementioned amount.