When you’re saving money for financial goals, one of the most overlooked, yet most important aspects is where to store it. Savings and money market accounts offer above-average interest rates and keep the money liquid and are ideal in the case of short-term needs, like emergencies.
Alternatively, CDs or Certificates of Deposit are beneficial in saving and gaining interest on capital for the long term. Certificates of Deposit are one of the most popular methods of saving money long-term.
In this article, we’ll answer the question of “what is a certificate of deposit”, how it works, and in what scenarios you may want to have one.
Understanding CDs (Certificates of Deposits)
Opening Certificates of Deposit is like opening a standard bank or financial institution deposit account. The process involves four elements to understand after deciding on the type of CD to open.
Interest Rate
Most Certificates of Deposit (CDs) have fixed interest rates. Some variable-rate CDs are also available, and they help yield high returns. With fixed Certificates of Deposits, one knows the return by the term.
Tenure or Term Period
It is the length of the period (ranging from six months to five years) that one agrees to store the capital to alleviate penalties. The tenure or term ends on maturity, and the user withdraws the amount without penalty.
Principal Amount
With an exception on certain types of Certificates of Deposits, it is the amount a user agrees to deposit when opening a CD account in a bank or a financial institution.
Financial Institution or Bank
The bank or credit union that opens the Certificates of Deposit determines the agreement rules and policies, like EWPs (Early Withdrawal Policies). Additionally, the financial institution analyzes whether there is automatic reinvestment of Certificates Deposit if the maturity agreement doesn’t mention instructions.
After creating and funding the Certificates of Deposits accounts, the credit unions, banks, and other financial institutions administer monthly or quarterly interest payments to the CD balance along with paper or electronic statements.
Leveraging Technology in Managing CDs
In today’s digital age, managing Certificates of Deposit (CDs) has been greatly simplified and enhanced through technological solutions. Many financial institutions offer robust online banking platforms, allowing users to open, monitor, and manage their CDs remotely.
Advanced features include automated alerts before maturity dates and performance analytics. Furthermore, fintech innovations have introduced mobile applications dedicated to investment tracking, providing real-time data and personalized financial insights.
These technological tools not only offer convenience but also empower users with greater control and understanding of their investments.
Why Open a Certificate of Deposit Account?
Unlike other investments, certificates of Deposit are safely fixed and federally insured. The highlight of CDs is that their interest rates are higher than most investments by bank accounts.
Most Certificates of Deposit render higher interest rates if it is for a longer tenure. The investment alternative has become attractive for most individuals. People want to save and gain high-interest rates without engaging in risky and volatile investment schemes. It is one of the prime reasons why opening a Certificate of Deposit account is profitable.
Are Certificates of Deposits Safe for Investment?
Certificates of Deposits are the safest investment tools in the US marketplace. There are two reasons why CDs are safe investment alternatives.
Federal-Insured Accounts
The best part about Certificates of Deposits is that they have Federal insurance that covers every deposit amount/product. The FDIC (Federal Deposit Insurance Corp.) renders insurance protection for banks, and the NCUA (National Credit Union Administration) offers insurance for credit unions.
When an individual establishes and funds a Certificate of Deposit account with an NCUA or FDIC-insured credit union or bank, the US Government protects more than $ 255,000 of the deposit fund within the institution. Banks and credit unions will rarely fail, but it is good that one’s funds or savings won’t be in jeopardy. Individuals should understand its terms and conditions and what a certificate of deposit is.
Fixed, Assured Interest Rates
The foremost reason is that the interest rate is fixed and assured. There is no risk of low ROIs (return on investments) even if the market fluctuates or becomes volatile. Users get what they have signed for in the deposit agreement with banks or credit unions.
Conclusion
Certificates of Deposits offer stability to those who desire to earn more without risks. The funds are safe as long as individuals pick FDIC or NCUA-insured institutions.
To understand why CDs are good investment options and when to establish and fund a CD fund, a person should be aware of what a certificate of deposit is and its benefits and risks. Understanding the basics helps to pick the ideal CD type and the most profitable tenure.
