Think Safety: Learn How to Invest in CDs
Have trouble thinking long-term when it comes to investing? Try CDs.
Feb. 18, 2010— -- Banks offer certificates of deposit with interest rates depending on how long you are willing to park your money and the amount you invest.
While rates on traditional savings accounts vary over time and investments like stocks or mutual funds come with risks (you can lose your initial investment after all), CDs offer some surety.
You'll get the promised rate (unless you withdraw the money before the term of the CD) and your money is completely safe at banks that carry FDIC insurance, up to the limits of the program.
Most often, CDs are named with their term of maturity -- a 6-month CD, for example, will mature six months from the time you make the initial deposit. A 2-year CD would mature in 24 months.So, how do you actually save with a CD?
First things first: determine the amount of money you want to save and the amount of time you are willing to have that money tied up and unavailable to you.
Traditionally, the larger the amount of the initial deposit and the longer term you're willing to commit to, the better the interest rates.
Once you've determined the basics, it's time to go shopping.
You can purchase CDs at banks down the street or across the country. Experts suggest looking online resources (Bankrate.com has excellent CD shopping tools) and asking for CDs rates at local banks.
One thing to keep in mind as you're shopping rates – be sure to look at the "yield" in addition to the quoted interest rate. The CD's yield takes into account the rate of compounding.
Once you've found a rate you're interested in, invest the money. From there on, it's all about waiting. Withdrawals before the maturity date will incur fees that will likely wipe out much of the interest you've earned.You don't have to do anything until the CD matures.
Once the initial term is complete, you'll receive a notice from the bank that it's time to decide what to do with the CD and interest earned. If you don't do anything, the bank will most often reinvest the money in a similar CD, locking your money up for an additional amount of time.
