Certificates of Deposit 101

August 15, 2008 · Posted in Investing 

A certificate of deposit is one way of investing your money. When you put money into a certificate of deposit, it keeps that money at a set or fixed interest rate for a certain time period, depending on what type of CD you get. The fixed interest rate means it will not adjust for inflation, and remain the same throughout the entire term of the CD. Though interest rates for certificates of deposit are generally higher than the interest rates of a standard savings account or a standard money market account, the rate of return you get is generally considered to be low in comparison to the rates of return other types of investments pull in.

A certificate of deposit pays interest in one of several ways. Some will automatically deposit your interest monthly or quarterly into the account of your choice. Others will add the interest back into the certificate of deposit itself, and still others will pay the interest when the CD’s term or time period is over. Some CD plans will also roll over into a new CD automatically upon expiration of the term, investing it again at the current market rate. Since the interest rate on your CD is already fixed, it will not adjust up for inflation throughout its term, and if it automatically rolls over into a new CD at current market rate, you may get locked into another term with a rate that is not what you would like to see.

Since you cannot access the money you put into a CD for whatever the set time period is, CDs are not a good idea unless you know you will not need that money before the time limit expires. Withdrawing money from a certificate of deposit before the time period is over will leave you with early withdrawal fees and penalties that may not be worth the risk at all. And if your CD is one that will automatically roll over into a new one upon expiration of its term, you will certainly want to keep a close eye on it in order not to miss that day and have your money tied up for even longer.

To summarize, certificates of deposit are good low risk savings tools. If you do not need to take your money out early, getting a CD with a long term may prove to be a wise choice, but you must read the terms carefully, as with anything, before signing on the dotted line.


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