As a college student who will graduate in less than a year, I am thinking seriously about my financial future. Thus while the task of finding a job and building a career can be fun and exciting, it also involves the careful planning that comes with preparing to make prudent use of my money. In considering various types of investments that are currently available, CDs (or Certificates of Deposit) have periodically crossed my mind. If you are interested in CDs as well, there are at least three things that you should know about them:
1. Definition
In defining the certificate of deposit, The Wall Street Journal notes that they are low-risk investments suitable for cash you won’t be in need of for months or years. If the money is left alone during the period of investment (which is deemed a “term” or “duration”), the bank will pay you with an interest rate that is slightly higher than what you would have received from a checking account or money market. Although one can make a substantive amount of money with the CD, it is considered to be a relatively low-return investment.
2. Risk Level
In discussing certificate of deposit basics, The Wall Street Journal states that they are one of the safest types of investments a person could make. This is the case given that the interest rate is predetermined. Moreover, you are guaranteed to receive back what you’ve put in as well as interest. Moreover, your CD will likely be insured for up to $250,000 by the FDIC.
3. Types
There are a variety of CD types, and familiarizing yourself with them can better equip you to decide which is right for you. Here are several kinds:
1. Traditional CD: With this CD type, you will receive a fixed interest rate for a term. Once the term is complete, you can either withdraw your money or put it in another CD. If you withdraw before the CD matures, you may be faced with a large penalty.
2. Bump-Up CD: With this type of account, you can swap your current CDs interest rate for a higher one given that the rate on new CDs with a similar duration go up during the period in which you invest. The majority of the institutions that offer this kind of CD allow you to “bump up” once during the CD term and retain the new interest rate for the remainder of the old CDs term.
3. Liquid CD: With a liquid CD, you can withdraw a portion of your deposit without incurring a penalty. Generally, the interest rate for this type of CD is a bit lower than the others. Nevertheless, the rate is still greater than what you would attain with a money market account.
Conclusion
Although there are a variety of ways that an individual can begin developing or continue growing wealth, investing in CDs could be a viable option for many people. In light of the fact that they have relatively low risk rates as well as a high security level, they may be the right investment option for you. Good luck!
