Years ago, a financial planner suggested I buy certificates of deposit, CDs, at a local credit union because the interest rate was good. I took his advice, but didn’t realize right away that I should be checking the interest rate every time they expired before renewing.
Recently, I cashed in all but one of the CDs because the rates weren’t competitive.
When I logged into another credit union that I belong to, I saw the yield was higher, 4.1 annual percentage yield, or APY, for 13 months, so I went over right away and purchased their CDs. I took action right away because the yields can change fast.
A good thing I acted quickly. As of Sept. 1, their rate went down to 3.85 APY.
What are CDs?
They’re a savings account that pays a fixed interest rate on your deposit for a certain period of time, and the money can’t be taken out of the account during that time without a penalty.
When would buying CD’s be of value?
If you want to put some of your money in an investment that isn’t as volatile as the stock market, a CD could be a good choice. Also, if may be a good way to lock up a large amount of money you’ve already saved for a wedding, a car, or a home until you’re ready to spend it. Don’t use CDs for your emergency fund or long-term investments. You’d need to pay a penalty to get your money early for an emergency and the stock market performs better than CDs.
What do you need to know when shopping for CDs?
Make sure the financial institution is insured by the FDIC. If you purchase a CD from a third-party broker instead of directly from an FDIC-insured bank, you’ll need to rely on the broker to make your deposit and acquire the CD on your behalf. In addition, find out what your deposit agreement says about your interest payments. Some have variable interest rates based on a preset schedule and others are tied to the performance of market indexes. Also, find out if the CD would automatically renew at the maturity date if you don’t withdraw the money and if the interest rate would be the same. You’ll likely want to withdraw your money if the interest rate is lower.
Be suspicious if the advertised CD rate is far above the competition. CDs may be offered by a company that isn’t federally insured, meaning money invested could be lost if the company goes bankrupt. In addition, there’s a common marketing ploy to lure customers with a temporary high CD rate with the goal of eventually selling them something else.
Final thoughts
CDs are a good way to save, however, knowing how they work will enable you to better meet your needs.
