What Is A Certificate Of Deposit?

A Certificate of deposit is a type of investment which involves you agreeing to keep your money with a financial institution for a certain period of time, in exchange for receiving a certain rate of interest for the time that they have your money.

One of the major advantages of a certificate of deposit is that if you keep your money with an insured bank or savings & loan company, then your money is guaranteed to be there until your certificate of deposit expires. This makes them a very secure form of investing.

Generally a certificate of deposit is given for one to five years, and the longer you agree to keep your money with that financial institution the higher the rate of interest you will get.

Note : You can have a certificate of deposit for shorter than a year, such as for a few months, but this will give you a much lower return on your original investment.

Taking Your Money Out Earlier

If you decide you need to take your money out sooner than what you initially agreed upon, you will be charged a fine.

This fine can vary depending on how much money you are taking out and the financial institution you are dealing with, but it could result in you being fined more than your original investment which means you end up loosing money. So this should only be done as a last resort.

Some certificate of deposit investments may be advertised as having no penalties, although in reality it is most likely they do (usually if you withdraw your money a few days after you deposited it).

Certificate Of Deposit Interest Rates

The amount of interest you get from a certificate of deposit investment will vary between the different financial institutions, although you should get a better rate than you would from a regular bank account.

Some certificate of deposit investments offer fixed interest rates, which means you get the same interest rate the whole time that financial institution has your money.

Others offer variable interest rates, which can go up or down depending on the market.

If interest rates are low (as they are now) it is best to go for a short term certificate of deposit, as this will help you to avoid tying your money up for long periods at a low rate of interest.

Some banks however will allow you to add more money to your investment at the interest rate of a particular day.

So even if you do opt for this type of investment and are currently getting a low rate of interest, you may be able to add more money to your account when the interest rates rise to boost your overall rate of return.

Where To Get A Certificate Of Despot?

Most people will just go straight to the bank for a certificate of deposit, however it definitely worth shopping around because interest rates can vary considerably depending on where you go.

Credit unions for example tend to offer the highest rate of interest on your certificate of deposit, typically up to ½% higher than what banks offer.

Although this may not sound like a lot, it can make a large difference when you are investing large sums of money.

If you are thinking of investing your money with a certificate of deposit, here are some things you should take into consideration before doing so.

Minimum Deposit

What is the minimum amount of money you are required to deposit?

If you don’t have much money to invest your choices will be limited to a smaller number of financial intuitions, which are likely to give you less return on your money.

Interest Rate

How much interest are you going to be receiving on your money, and is this a fixed or a variable rate?

Can you get a higher rate of interest for investing more money, or investing it for longer?

How long will you get a certain rate of interest? Is it an introductory rate that declines after the first year?

Compounding Of Interest

How often is the interest on your investment compounded? Ideally you should be looking for daily, weekly or every month compounding.

Penalties

What is the penalty for withdrawing your money early? If you are investing a small amount and there is a chance you might need to withdraw that money early but would get a heavy fine for doing so, then it might not be worth the risk.

Insurance

Does your financial institution offer insurance on your money, so that if they go bankrupt you don’t loose your investment?

Incentives

Does your financial institution offer any incentives for keeping a certificate of deposit with them? Such as wavering of fees on any services they provide?

How Helpful Are They?

Whatever financial institution you choose they should be able to answer all your questions, and provide you with the help you need. If they can’t, look elsewhere because there are plenty of options available to you.

Certificate Of Deposit

A certificate of deposit can be a good investment option, providing you can get a decent rate of interest and will not need that money for a long time.

However there are lots of different investment options when it comes to a certificate of deposit, so always ensure you do your research before you choose to invest your money with anyone.