A certificate of deposit is a method of saving money that allows investors to earn interest on money that they agree to “tie up” for a specific length of time. When money is “tied up”, it means you do not have easy access to the cash – although not completely impossible, it is not ideal or recommended to take money from a certificate of deposit before it's scheduled maturity date.
The length of time the money will be tied up varies, and investors can choose certificate of deposit terms ranging from as little as three months at a time to five years or more. Typically, the longer your certificate of deposit term, the higher your interest rate and the more money you will earn.
Access To Money in Certificates of Deposit
If you think you will need access to your money in the near future, it's better to select shorter term certificates of deposit that mature in a reasonably short period of time. If you try to pull your money out of your certificates of deposit early, you will pay penalties and end up losing some of the money invested- as well as any interest you would have earned if you left the money in until the maturity date. Selecting 3 or 6 month terms, or one year certificates of deposit for at least some of your money makes it possible for you to access it in a shorter period of time in the event something happens and you need the money. (If they mature and you don't need the money, you can always reinvest into new certificates of deposit.).
If you are fairly certain you will need some or all of your money before you reach maturity dates, you may be better off putting your money into a money market account – where it can earn a higher interest than a traditional savings account, but you have full access to your money if something comes up.
A Guaranteed Savings Strategy
Unlike other forms of investments and strategies for increasing your savings, certificates of deposit purchased through a banking institution that is FDIC insured means the investment you make in a certificate of deposit will be guaranteed by the federal government. You are not in danger of losing your initial investment, the way you are with certain other investment strategies.
The amount of your principal investment (the initial deposit made in a certificate of deposit) will not decrease. The FDIC usually insures up to $100,000, so if you happen to be investing more than that, you would want to get multiple certificates of deposit so that each of them would be individually covered under the FDIC guarantee.
Certificate of Deposit Rate of Return
The interest rates earned on certificates of deposit depends on where you get them, how much money you are investing, and how long you choose to invest for. The interest rate on certificates of deposit are almost always better than what you could earn on that money in a traditional savings account or a money market account.
When you are considering investing your money in certificates of deposit, it's best to take the time to research rates offered by many banks to make sure you select the one with the best interest rates to maximize your earnings. Be sure that the institution you select is insured by the FDIC, and that it offers the best interest rates for the length of time you wish to invest your money.