What is Certificate of Deposits

Certificate of Deposits, otherwise known as time deposits, are usually savings accounts that are deposited in the bank during a prearranged period of time with a fixed interest rate and can only be withdrawn on Savings accounts that earn a preset rate of interest, during a prearranged time period and can’t be withdrawn before maturity, are identified as Certificates of Deposit or CDs.  CDs can be made as short as a month or as long as 5 years, based on your agreement with the bank or credit institution Depending on the agreement with the bank or institution, CD maturity can be as short as a month or up to five years.

CDs are effectively risk free in the sense that it is insured (insured by the FDIC for banks or by the NCUA for credit unions) to a great extent like a savings account Similar to a savings account, CDs are basically risk free because they are insured (insured by the FDIC for banks or by the NCUA for credit unions).  The insurance coverage for CDs is $250,000 for solitary depositors and $250,000 per co-depositor in a dual account for dual accounts until December 31, 2013.

How time deposits work  :
Banks require a minimum deposit to open a CD.  Most people say that Time Deposits are only good places to put short term money. The reason behind this is that inflation is only going to kill it if you were to tie your money for 5 years.  Different banks and financial institutions offer CDs at different interest rates. There are those that give the best interest rates for a $100,000 deposit but there are also some who provide low interest rates for high deposits.

Advantage of CDs :
People tend to go with CDs rather than depositing their money in regular savings and checking accounts because of higher interest yield.  Aside from this, CDs are safer and less volatile unlike all the other money markets available. Because of the fixed interest rate, your return on investment is guaranteed despite the fluctuation of market inflation.  Opening a CD is as hassle-free as opening a regular savings account. All you need to do is to walk in your bank of choice, show them the needed requirements and you can walk out with a CD in hand. The good thing about getting a CD is its transparency.  Once you purchase a CD, you will be given a paper stating the length of lock-in period and how much return you will be receiving until maturity.

Disadvantage of CDs :
Although CDs are less volatile, they also generate lower interests as compared to other investments. Furthermore, your money is tied up for the length of the CD and you won’t be able to take it out without paying a substantial withdrawal penalty. As the rate of interest is fixed, it is difficult to change or to take advantage of the market situation when the market rates are favorable. Since the coverage for CDs is only $250,000 per deposit in a single financial institution, you are more than likely required to open another CD in another institution if you want to invest more than $250,000. Thinking about it is hassle enough, what more doing it in real life.

What to look for :
In order to get the most out of your money, you must shop for banks with the highest interest rates.  It is also advisable to pre-plan your financial needs so that you will know how long it is advisable to keep your money in a time deposit.