How Certificates of Deposits can Build Your Earnings

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Being aware of different investment strategies is always a good idea, as some of them may benefit you in the long run. A CD, for instance, is an investment opportunity that can help you take advantage of higher interest rates.

What are Certificates of Deposit?

A certificate of deposit, or CD, is an investment opportunity offered by banks and credit unions. How it works is that you will leave a lump sum deposit for a certain amount of time, and they will pay you a premium interest rate. CDs are a safer investment alternative than most other options. They offer a lower rate of return than stocks or mutual funds, but they will guarantee growth.

What types of CDs are available?

There is a wide range of options for the type of CD that you could get. You can get a higher interest rate if you put more in, so it depends on how much money you are able to temporarily lock away. The shortest terms of a CD are typically 3 months, with an interest rate of approximately 0.2%. The longest CDs can be over 5 years, with an interest rate of over 1.5%.

Some CDs will require a minimum deposit in order to open them, while others do not. As well, some institutions will inflict a financial penalty on the account owner if they withdraw their money early. Be sure to shop around before you decide on a CD. Consider what plan is best for you, and what timeline you are comfortable with.

How to open a CD

Opening a certificate of deposit is similar to opening a new bank account. However, you will be signing paperwork to agree to keep the money in for a certain length of time. All in all, you will be agreeing on the interest rate, the length of time, and the amount that you will be depositing into the account. After this has been decided, the financial institution will send you regular statements so that you can see how much interest you have earned. The interest will be added to your CD balance. At the maturity date, you can withdraw the money, or re-invest it for another length of time. When looking to re-invest, the interest rate will sometimes be different than it was before. Check to make sure that the interest rate is agreeable to you before re-investing.

Are CDs worth it?

Even though CDs are not directly linked to the stock market, they are an investment of their own. They are less risky than other securities such as stocks, which could plummet unexpectedly at any time. CDs tend to earn more interest than a traditional chequing or savings account. They are definitely worth it if you are able to avoid withdrawing from them. If you frequently need a more liquid form of cash, CDs will not be your best option. This is because the penalties for withdrawing early will not make up for the interest that you are earning.

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