Whenever you think saving money, there is usually always a question of whether you must open a savings account or a certificate of deposit (CD). Although the two accounts have advantages, a CD can be a better choice if you intend to save large amounts of money because it can earn you more interest over time. I do not know what a CD? Here's what you need to know.
What is a Certificate of Deposit?
A CD, while technically not a savings account, functions somewhat similar to a. Essentially, the applicant receives a "certificate" or a ticket from a bank, credit union or similar financial institution indicating the deposited funds earn interest for a pre-determined amount or term. While the interest rate (or APY) is set by the institution, the mandate of the account is usually chosen by the applicant. Conditions do, however, fall within a specific range (eg three months to five years), and almost always should be intervals of three or six months. Your financial institution will usually give you a list of terms, it offers to choose from and the conditions in which the CD work. In general, the longer, the higher the APY.
What are the advantages of CD?
CD are somehow the best of both worlds, because they allow higher APYs while ensuring stability and security of a savings account. Almost all investments follow a risk-reward relationship in which more return, the riskier the investment, or vice versa, but the little CD subvert this because they are not only insured by the FDIC, but also in term lock with fixed APYs. This means that if interest rates fall, your CD will always compounds the initial rate set for the duration of the term. Finally, CDs are also renewable, meaning that you can keep your money in the account indefinitely and roll it over into another term. Because of this risk equal, a higher dynamic reward CDs can sometimes make more sense to just leave your money in a regular savings account.
What are the disadvantages of CD?
The biggest drawback with the CD is that the applicant is required to compromise flexibility for higher interest rates. Because the CD need fixed terms, the money can not be disturbed for the entire term, unless you're willing to pay penalties or completely close the CD, which also requires you to pay a penalty. In addition, money can not be added to an existing CD. Although there are exceptions with CD without penalty, these returns are so small that it is usually better to open a savings account. Since CDs are seen more as a long-term investment savings account, they also need a minimum deposit which is relatively higher than most savings accounts.
There are some warnings and some standard features. For example, be sure to check with your bank to terms of your CD. While every CD we are looking at a fixed rate, other banks could offer variable rate CD and it is yours to make sure you understand what you are getting into. Finally, beware of automatic renewal options, which means once the CD has matured, it will automatically roll into a similar term CD. Although an automatic renewal could save you time, it could also cost you money if you are not careful enough, because the new CD may have a lower interest rate. To avoid this potential loss, you'll want to make sure you mark your calendar for when your CD term is almost up. This way, you can call or visit your bank and assess what you would do. Although CD management is a more passive case that the management of a savings or checking account, you'll want to make sure you're always on top of what happens to your money.
When should I open a CD?
In general, when you have some money you can put aside for a while and do not have immediate plans for a CD is not a bad option. In most cases a CD will outcompete a savings account in terms of long-term savings. Of course, a CD could never replace a savings account like a CD can not be used for emergency funds or construction balances as you can with a savings account. Basically, the CD are ideal when you want to make long-term investment with a modest amount of funds without a riskier investment.
Read our savings accounts reviews to see which banks offer CD and follow our savings online blog for more information on how these banks work.