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CDs - Investing in Certificates of Deposit
CDs - Certificates of Deposit
Over the years, CDs have been popular investments. They have become known for living up to promise of safety and income. You expect to get your money back, that you put into a CD, after a specific amount of time has passed. You not only get that money back, but all the interest it has earned. You are basically agreeing to leave your money on deposit for a particular amount of time, in return for this investment. The time frame is usually about six months to five years.
The minimum deposit is usually around $500.00 but you can go up really as high as you like. The money you put in is of course known as your principal and the length of time the CD is for is known as the term. After the time has passed, your CD has matured, or reached its maturity.
The Possible Rewards and Risks of CDs
Risks of CDs
While the risks are generally low in this kind of investment, they are still there. Compared to other risks with other investments though I don't think they are too bad. For instance, your money is locked in at a particular rate, even if the interest rates go up. You are then "stuck" in that situation and can't move your money around to go with things and have to wait. If you do choose to remove your deposit earlier than agreed, there are big penalties for doing so. Its always possible that your money could earn more with other non bank options that are out there. If the bank you are with should be taken over by another bank, then your rate or term may change, so read the fine print carefully. The new interest rate may be lower when you reinvest or roll over the CD. Some people just want a higher interest rate than CDs can provide.
Rewards of CDs
Your bank investments are insured up to 100,000 dollars which is always a great back up. There are no charges for a bank CD. The possible changing economic conditions do not reduce what you earn. The yield on certificates of deposits are higher than on other bank accounts. You can plan for the future to some degree, as you know what you will have and when you can take that out of the bank. There can be great yields when banks want cash to make loans.
So you can see why CDs are appealing to many people and to banks, as it seems everyone wins unless you need to take the money out early. Of course, if you are in debt and paying a decent interest rate on your credit card payments, it probably is wisest to get out of credit card debt first.