Five Tips for Picking a Certificate of Deposit

Have you been thinking about investing in a CD account lately but you don’t know where to start? If so, here is a quick guide to helping you pick the ideal CD for your situation.

1. Make a financial plan. This is the first step before making any type of financial investment. You have to realistically evaluate your finances before you can even start looking at CD accounts. You can do this on your own, but enlisting the help of a financial advisor can help give you objective advice about your income and investment opportunities. They can also explain your options so you have a better understanding of where your money is going to go as well as the level of risk incurred with each investment account.

2. Know when the CD matures. It might seem like a no-brainer, but many people who invest in CD accounts do not take the time to find out when their CD reaches maturity. When they try to withdraw their money, they are surprised to find out that they cannot take it out without a penalty for another five or ten years, depending on the term of the CD. If you can’t have your money tied up for very long, consider buying CDs with shorter terms, such as a 12-month or 18-month CD.

3. Check to see if it is a callable CD. Callable CDs often offer a slightly higher interest rate but the bank has the right to return your money with interest after a certain period of time. This protects the bank from locking into an interest rate that is higher than they want to pay if rates drop. You will receive all of your money back along with any interest that has accrued, but this will reduce the total amount of money you can make by cutting your CD short.

4. Know the CD rates that you will receive. One of the main features of investing in a CD account is the interest rate you will receive. Also, find out if it is a fixed rate or a variable rate. A CD with a variable interest rate may change over time based on the current interest rates across the nation. With a fixed rate CD, however, you will get the same rate for the term of the CD for as long as you keep the money invested in it.

5. Know the withdrawal penalties. CDs are great investments if you never plan on touching the money you have invested. However, if you plan on taking the money out before it matures, you should know how much of a penalty you will pay. Sometimes the penalty is more than you will earn so be careful.

Information is the key to making money by investing in certificates of deposit. Know what you are doing before making the investment and you will come out ahead financially by the time the CD matures.