Saving with Certificates of Deposit
Though they are somewhat of a staple of the financial services
offered by banks, a large number of people aren't entirely sure
how certificates of deposit work. They might know that
certificates of deposit, or CD's, are usually purchased from a
bank and that they last for set periods of time, but they might
not know how savings are built with these CD's or what some of
the terminology associated with CD investments mean. The
information below is meant to serve as an introduction to
certificates of deposit, and should help to answer some of the
more basic questions that you might have concerning CD's.
As with any financial investment, it's important to make sure
that you understand exactly how certificates of deposit work and
how you can use them to augment your savings before putting your
money into a CD. Check with your preferred bank for information
about the specifics of their certificates of deposit or perform
additional research online before investing your money.
How CD's Work
Certificates of deposit work much like common savings accounts,
with the restriction that the money invested into the
certificate is not to be withdrawn until the CD has reached its
maturity. The maturity of a certificate of deposit is the point
at which the amount of time that the CD was purchased for (also
known as a term) has ended, and the CD no longer collects
interest at the rate it previously was. Once a certificate of
deposit has reached maturity, the full value of the CD can be
withdrawn without penalty and the money is often transferred
into other savings or into chequeing or money market accounts.
Maturity and Withdrawal
Since the money invested in a certificate of deposit will
continue to draw a nice interest rate until the CD reaches
maturity, it makes sense that you would be encouraged to keep
your money in the certificate until maturity has been reached.
Most banks and issuers of certificates of deposit don't want t
be entirely unreasonable, however, and generally offer a brief
period each year where the certificate can be cashed in before
it reaches maturity without the usual penalties for early
withdrawal. You should make sure that you know when this period
is if you plan on cashing in your certificate beforehand,
however... depending upon the issuer, some of the fines
associated with withdrawal before maturity can be quite steep.
Choosing the Right Term for Your CD's
The term that you choose for your certificates of deposit will
largely depend upon how long you want your money to draw
interest before you need it. If you're planning on using CD's to
plan for future events such as a wedding, additional schooling
for your children, or retirement, you might want to consider a
long-term certificate. If, on the other hand, you're wanting to
use a certificate of deposit to set aside money for a vacation
later in the year or another similar short-term circumstance,
you don't want your money to be locked in a CD for an extended
amount of time.
Using CD's to Enhance Your Savings
In order to use certificates of deposit to enhance your savings,
it's important to remember that unlike traditional savings
accounts you won't have as easy of access to your money in a CD.
The advantage of this is that you can more easily resist the
temptation to "borrow" from your savings. Several CD's with
varied terms can help you to get the most out of your savings
without locking all of your money away until a 10-year maturity
date.
You may freely reprint this article provided the following
author's biography (including the live URL link) remains intact: