Certificate of deposit is for those who don’t prefer taking risks in investing money. This type of investment is not restricted to one particular age group. Anyone can make use of this plan. However, they will not be able to withdraw the money within a short time frame. This plan suits people who don’t need the invested amount quickly. If you are planning to buy a vehicle or a house, you will not need money immediately. You may prefer to save cash safely with minimum risks and get the maximum benefits over a period of time. During such cases, there is no better choice than investing in certificates of deposit.
There are two deciding factors which need to be taken into account before choosing Certificate of deposit.
1. The time limit: You should know the time when you will require the invested money. If you have an alternate source of money which you can use for at least a period of six months or more, then you can think about investing your money in Certificate of deposit. Moreover, you should also make sure that the money you have can be made available to you any time you want.
2. Rate of Interest: The interest rates are very important. It will help you to decide the duration of CD. You can plan the time limit up to which you want to invest the money. Sometimes, the rate of interest will be high and this happens when the inflation rate is more. During such situations, it is better to invest your money in CD for a short period of time. On the other hand, there may be times when the interest rates are low. This is when you should opt for a long-term Certificate of deposit because you can make more money.
Now that you have decided to go for CD, you should be well aware of the following two terms.
• APR- The expansion is annual percentage rate. In clearer terms, it is the rate of interest which a bank provides for the investment.
• APY- Otherwise known as annual percentage yield, it will give you information on the amount of money that you will receive as a result of the investment. The invested money will compound if it remains for more than a year and that is exactly what you will know.
Compounding simply refers to the growth rate of your investment. If you have finally made up your mind to invest in CD, then you have to follow the below mentioned steps.
1. Select the time duration: As the first step, you have to decide the time duration for which you want the money to remain in CD. There are so many factors that determine the time factor. It depends upon the time when you will be in need of the money. It also depends if you have alternate financial choices to manage your expenses. This money should be available for you till the invested amount matures.
2. Choose the type of CD: Decide the type of investment. If you want to deposit your money in CD for three years for a higher interest rate, then it would be best to opt for a bump-up CD. In case, you require the money for unexpected reasons, then you should invest it in a liquid CD.
3. Check the rate of interest: If you have finally decided on the time duration and the nature of your CD, then it is time to compare the different interest rates offered by several banks.
Laddering is an excellent way to avoid glitches in a CD investment. It works really simple. Instead of investing all the money in a single type of CD. You can divide the cash and put in different plans. The interest rates will be better and you can easily access your cash when it matures.