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Picking the Best Certificate of Deposit

Picking the Best Certificate of Deposit

There are many different types of certificates of deposit (CD) available to you. Don’t be dazzled by very high CD rates. The right CD for you might actually have a lower CD rate, and less risk associated with the CD than other types of CDs you are considering.

Before you run out a invest in a CD, or search online, you need to make sure you fully understand all the aspects, terms and carefully read the disclosure statement of the CD. As with any purchase you need to comparison shop, ask questions and verify answers with an unbiased source. These CD tips can help you and other investors decide if you're picking a CD that’s appropriate for your investment needs.

Before you make any investment decisions you should first think about what your Financial Goals are. Take a long and honest look at your entire financial situation,your needs, long term and short term. The first step to successful CD investing is figuring out what your goals and risk tolerance are. Most people can figure this out on their own but you might decide you need professional financial help. CDs and other cash equivalents, such as savings accounts, treasury bills, money market deposit accounts, and money market funds, are all slightly different types of investments.

When you're comparison shopping you'll see bank CD rates and bank savings account rates will differ. The highest savings account rates might not be as high as the best CD rates available. Two of the most important things when investing in deposit accounts is the safety of the investment which is FDIC insured for up to $250,000. The second important thing is the  inflation risk, are you staying ahead of inflation? If not you run the risk that inflation will outpace and erode returns over time.

Find out when your CD matures, most people forget to stay on top of this. This simple step will save you money if you find out your CD was renewed for another year, five years or even ten years. Again, breaking a CD before it matures will cost you an interest penalty. These days you'll be shocked to see how low CD rates are as compared to CD rates just a few years ago.

Before you invest in a CD, make sure to have the CD maturity date in writing and write the date down on your calender or have a reminder on your email program. Looking into any call features the CD has, being able to lock in a higher CD rate for a long period of time is restricted with a callable CD. Callable CDs give the issuing bank the right to terminate the CD after a set period of time, but of course the CD investor doesn't have that same right.

If CD interest rates go lower by a large amount, the issuing bank might call the CD. In that case, you should receive the full amount of your original deposit plus any unpaid accrued interest. But you'll have to shop for a new one with a lower rate of return.

Author: Monica Harris
October 3rd, 2011