A certificate of deposit is a savings certificate entitling the bearer to receive interest. A CD has a maturity date, a specified and fixed rate of interest and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the Federal Deposit Insurance Corporation. A CD can be issued with maturities dating from one month to 10 years.
It is generally recommended that you set aside cash of approximately 3 months of your salary for house hold expenses and emergencies.
The first type of investments are certificates of deposits or term deposit certificates. CDs as they are generally called.
You’ll earn more in a longer-term CD, but be sure you won’t need the money before the term is up. There are penalties for early withdrawal.
Certificates of deposit (CDs) make financial sense for people of all ages who want a low risk investment to park cash they don’t plan to use immediately. Maybe you want to use your cash to buy a car or make a down payment on a house pretty soon.
If you won’t need your cash reserve in the immediate future you’ll likely want that money to earn a better rate of return than your savings account offers. This is when a CD is useful.
When will you need part or all of your cash? Do you have other cash resources to access in an emergency? If you have a sum of money and don’t expect you’ll need to use it for six months or longer, a CD may be ideal.
If rates are rising a short-term CD may be best. If rates are falling a longer-term CD will earn you more money, you can lock in a higher rate of interest.
Once you have decided a CD is an ideal investment for your cash. Determine how long you want to lock in your money. This will depend on when you need the money or whether you have other cash assets to tide you over until the CD comes free.
Decide which kind of CD suits you best. Do you want to invest for two years and don’t want the risk of being stuck with a low rate, then a bump-up CD may be ideal. Afraid you’ll need part of your deposit for an emergency? Consider a liquid CD.
Once you’ve selected the duration and type of CD you want, find out what rates are available at different banks.
One way to invest in CDs is to use a technique called “laddering.” This strategy gives you regular access to part of your cash and protects you against rising interest rates.
Instead of investing all of your cash in one CD, you can divide it into equal parts and invest each in CDs of varying time durations.
Let’s say you want to invest $20,000. By laddering, you would invest $6,000 in a one-year CD, $7,000 in a two-year CD and $7,000 in a three-year CD. Then, each time one of the three CDs matures, you would either take the cash or re-invest it in another three-year CD to keep your ladder in place.
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