Saving money can be hard to do at times. But there are some ways that your money can work harder for you than leaving it in checking, or opening a savings account. One of those ways is a certificate of deposit (CD).
Here is some basic information about what a CD is, how they work, and why you might consider including one in your personal savings plan.
What is a CD?
We’re not talking about compact discs. Certificates of Deposit are a type of deposit account with a bank that typically offers a higher rate of interest than a regular savings account.
When you purchase a CD, you commit to deposit a specific amount of money for a specific amount of time, which can be anywhere from one month to five years or more. In exchance, the bank pays you interest, typically at regular intervals.
When the amount of time agreed to for the CD has expired, it is referred to as the CD “maturing.” Once that happens, you can take your money with the interest it has earned and look for the best option for your money at that time. The money gained from interest on a CD is taxable as income, unless the CD is part of a tax-deferred (IRA) or tax-free (Roth IRA) retirement account.
There can be penalties if you want or need to remove money from the CD before it matures.
Like all bank account types, CDs feature FDIC insurance up to $250,000, per insured bank, for each account ownership category. At Popular Community Bank, interest on CDs is figured daily, and you have options for how that interest is paid to you.
Why should I consider purchasing a CD?
There have been times when interest rates on savings accounts and CDs were higher than they are today, but there have also been times when areas that aren’t as safe (or FDIC insured) were performing better as well. According to BankRate.com’s CD Rates Blog, there are some CDs available today that offer guaranteed rates that are in the neighborhood of the performance of some areas of the stock market over the last year.
Purchasing a CD is a great way to get your money to work harder for you without exposing it to much risk.
Also, purchasing a CD can be a good way to discipline yourself. If you have “money cravings,” such as hats, jewelry, music online or magazines, having your money locked into a CD is a way to keep yourself from dipping into your savings.
There are two important facts you need to be aware of when considering a CD, however.
- The money that is used to purchase the CD is tied up for the duration of the contract. As we mentioned previously, there are penalties for breaking the CD to remove funds before the maturity date.
- There is some risk involved to purchasing a CD. The risk you take is that the rate you’re getting on your money is the best interest you could get for the duration of the CD; if, at some point during the CD, rates go up, you are losing potentially larger interest at that point.
You cannot lose your principle (the amount of money used to purchase the CD), though. And the interest earned during the CD is guaranteed. Not everyone is comfortable with the amount of volatility in the world around us, and a safe harbor for your money with a guaranteed outcome can be a preferred course of action for some.
For more information regarding Popular Community Bank CDs and current rates, click here.