How do I Choose the Best Certificate of Deposit Account?

B. Miller

When choosing a certificate of deposit account, you need to determine how much money you want to invest, how long you want to invest it for, and the type of return you expect to get. Because these factors may be different for everyone, and will affect your investment, you need to figure these out and then check the certificate of deposit account rates available at different banking institutions. The three most important factors in this type of investment account are the interest rate, the amount of time until maturity, and whether or not the account is "callable," which means the bank has the freedom to terminate the investment before the full date of maturity is reached, generally due to changes in interest rates.

Decide how much you want to invest in a CD, and how long you want to keep the money invested.
Decide how much you want to invest in a CD, and how long you want to keep the money invested.

A certificate of deposit account, most commonly abbreviated as "CD," can have a maturity date anywhere from 90 days to twenty years. This means that when you place the money in the CD, it must stay in the account until the specified maturity date in order to earn the full amount of interest; once it matures, you are free to either take the money out or renew the CD. In addition, removing the money before the account matures will generally mean paying penalties in addition to the loss of interest. If the bank calls the CD before the maturity date, there will not be a penalty, but the only interest paid will be that which was earned up until that point, so some potential earnings will be lost; for this reason, many people prefer non-callable CDs, even with a lower interest rate.

The interest rate on a certificate of deposit account is generally much higher than other types of savings accounts, which is what makes them a preferred investment that is still safe and conservative. Most people prefer to choose a CD with a fixed interest rate, though variable rate CDs are available as well. These can be great if the interest rate goes up; less so if it drops. Be sure you understand when and how the interest rate can adjust throughout the life of the CD before investing. Also note how much of the investment will be federally insured.

Whenever you are choosing a certificate of deposit account, be sure to read the fine print and understand any risks; likewise, be sure to use money that you will not need to access before the maturity date. Some people choose to stagger their accounts in order to maximize benefit. For instance, purchasing a number of smaller CDs in one, two, five, and ten year increments, will offer benefit if interest rates rise, and protection if interest rates fall. This can be a better choice then putting a huge sum in one certificate of deposit account.

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