Why Bank CD's are a Solid Investment
A Certificate of Deposit (CD) is one of the few forms of saving money that is risk free, since it is always insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA) depending on where you do your banking. With the backing of the FDIC or the NCAU, you can be assured that your money is safe even if the financial institution should fail.
There are many other advantages that also make CD's a must for your investment porfolio, which will be discussed after a brief explanation of the basics of Certificates of Deposit.
What is a CD?
A CD is a type of savings account in which the account holder has agreed to keep his or her money in the bank without withdrawing it for a period ranging from three months to five years. The main reason for opening a CD is for investment purposes, since the account holder is rewarded financially for keeping his or her funds in place. It also lends to disciplined savings because a penalty is assessed for early withdrawal of a CD.
Main Advantages of CD's
Compared to a traditional savings account, keeping your money secured in a CD will earn you a higher percentage of interest with the added benefit that the rate of interest tends to be fixed. You will also earn a higher Annual Percentage Rate (APR) the longer you keep your funds in a CD. It is always a sound investment any time your money is working for you instead of you working too hard for your money.
When your money is earning interest in a CD, you have two options for how you want to collect that interest. The first option is known as a disbursed payment, which means that the investor has chosen to receive payment of his or her interest every month or quarter, as determined by the bank. The investor also has the choice of whether to have the interest payment directly deposited to another account which is held with the bank or to have a check mailed.
In the second option for receiving interest payments, the investor can choose to allow the interest to accrue until the expiration of the CD. The interest that has been accrued throughout the duration of the CD will be compounded, meaning it will be added to its balance in one lump sum and then withdrawn along with the initial funds when the CD has matured.
How to Obtain the Most Favorable Interest Rate
There are a few factors which come into play when it comes to receiving the best return on your CD investment. In general, you will receive the best rate when you deposit larger amounts of money for longer periods of time since this is of most benefit to the bank or credit union. Other factors which may play into this are competition between financial institutions, the present state of the economy and your previous experience as a customer of the bank in which you are considering investing.
Since a CD is a risk-free form of investment with fixed CD Rates, you can afford to take your time to shop around for the best deal. If you are not satisfied with the rate your own bank is offering you, don't feel obligated to do your investing there. One type of establishment you may not have considered is the online-only bank. Because their overhead and operating costs are lower than those of traditional brick and mortar financial establishments, they may have a bigger budget in which to offer better rates to their customers.
Brokerage firms may also be able to offer you a more favorable rate of return than your own bank. If you already have a broker, ask him or her about the brokered CD, which are CD's that are sold in large blocks and can be offered to customers of the brokerage at a high APR due to the wholesale buying method used to obtain them.