How to Choose a Bank CD
Certificates of deposit, commonly referred to simply as CDs, have always been a safe haven for parking money while accumulating interest. Putting money into and getting money out of a CD is very easy and convenient, as banks big and small offer these financial instruments. Because as little as $500 is needed to open many CDs, they are affordable to even the smallest investor. Investing in the stock market, mutual funds and real estate may give a higher return on the initial investment, but these can be very risky and principal invested can be lost. In contrast, investing in bank CDs guarantees the safety of the principal plus interest, even if the bank fails, because of FDIC insurance.
Other People Are Reading
Instructions
-
-
1
Determine the length of time you want to invest a sum of money. Certificates of deposit are available with a wide variety of maturity dates, which makes them very flexible and easily adaptable to individual needs. If you have money that you want to park for a short term, determine when you will need that money. Perhaps you'll need the money in three months to pay taxes. Maybe you're planning a vacation next year and want to save money for the trip. Financial advisers always advise their clients to have three to six months worth of household expenses put away in some type of accessible savings, such as a savings account, money market fund or CD. Although there is a slight penalty for withdrawing a CD prior to maturity, the interest paid is usually higher than savings accounts and money market funds, making them well worth the slight risk of needing the money before maturity.
Typically, the longer period of time to a CD's maturity, the higher the interest rate paid. Therefore, when it is unlikely that the money invested in a CD will not be needed for some time, choose longer time lines, such as three, four or five years. Of course, during a time of fluctuating interest rates, tying up money at a fixed rate may create "opportunity lost" if interest rates climb significantly higher. During these times it may be advisable to choose CDs with shorter maturity dates, perhaps six or nine months out. -
2
Compare rates at local banks. After you have established the length of time to maturity for a CD, then do some comparison shopping for the best interest rate. Local newspapers often have a weekly column in their financial section comparing CD rates for local banks. Use the yellow pages of your local phone book directory and call the banks in your area and ask for their current interest rate for the CD you want. Also, ask about any upcoming specials. Often, when banks need to raise cash, they will offer higher than usual interest rates on CDs.
-
-
3
Consider and compare local CD rates to those offered on the Internet. Some online banks may offer a higher interest rate, but you must take into consideration that you may not be able to withdraw your money as easily or as quickly as you could by simply driving to your local bank. Read any fine print, looking for the penalties for early withdrawal, the amount of time it takes for you to get your money when withdrawn or at maturity and any other fees involved in the transaction. Sometimes the convenience and ease of having access to your money locally is more important than a slightly higher interest rate. Use Google, Yahoo! or other search engines to find sites that compare CD rates of national banks and institutions. One such site is Bankrate.com.
-
4
Beware of minimum deposit requirements. You may find a CD with your time frame that has a higher interest rate than others, but be sure to check the minimum deposit requirement. Many CDs can be opened with as little as $500, but there are also many that have huge initial deposit requirements, such as $5,000 and even $10,000.
-
5
Consider IRA CDs, which are certificates of deposit structured in an Individual Retirement Account. Like traditional CDs, they are FDIC insured, have a fixed maturity date and usually pay higher interest rates than a savings account. They also charge a penalty for withdrawing funds before the maturity date.
-
1
Tips & Warnings
CDs generally pay a higher percentage than savings and interest-bearing checking accounts, so they are a better choice when putting money away for more than several months. The flexibility of selecting maturity periods from three months to five years also makes CDs attractive, especially for short-term, safe investing.
