Let’s dive into a topic that might sound a bit grown-up, but it may just be the right saving option for you: Certificate of Deposits or CD.
You might have heard about saving money in a bank, but what exactly is a CD, and how can it benefit you?
What’s a Certificate of Deposit (CD)?
Think of a CD as a special savings account with a fixed term and fixed rate that is usually higher than the rate for a regular savings account. Essentially, you agree to deposit a certain amount of money with a bank for a specific period, ranging from a few months to several years. In return, the bank promises to pay you back your initial deposit plus interest once the term ends.
Essentially, it is a “set and forget” type of savings account.
Why should you care?
- Steady growth: CDs offer higher interest rates compared to regular savings accounts. This means your money grows faster over time.
- Safety first: unlike investing in stocks, CDs are considered low-risk investments because they are insured, up to a certain limit. The amount that you initially put in is protected, providing peace of mind.
- Discipline pays off: with a CD, you’re less likely to dip into your savings for impulse purchases since withdrawing your money before the terms ends usually incurs penalties. This helps discipline yourself and think about saving habits.
- (Sometimes) tailored options: banks and other institutes offer various types of CDs, allowing you to choose terms that fit your financial goals, whether short-term or long-term.
How to get started?
- Research: look into different institutions that provide CD and the rate they offer as it is normally different.
- Set goals: think about WHY you want to invest in a CD. Are you saving for university, a car, or a future business idea? Knowing your goals will help you choose the right CD for you.
- Understand terms: make sure you fully understand the terms and conditions before committing. Pay close attention to the interest rate, term length, and any penalties for early withdrawal.
- Start small: if you’re new to investing, consider starting with a small amount. As you gain more confidence and understand the process better, you can gradually increase your investment.
What happens when a CD matures?
When it matures, there’s a time period of a week when you can withdraw funds. After that period, many CDs automatically renew for the same or similar term that they had previously. If it automatically renews, taking the money out before the next date will result in a penalty.
Conclusion
Certificate of Deposits might not sound as exciting but they are powerful tools for building a secure financial future. By starting early and making smart choices, you can set yourself up for success and achieve your dreams.
Source: nerdwallet, investopedia