A certificate of deposit, or CD, is a great way to save. It allows you to earn a guaranteed, competitive interest rate and not have to think about setting money aside on a weekly or monthly basis. You invest a set amount over a specific period of time and then watch your investment grow.
There are a variety of CD term lengths available at most banks. Short-term CDs typically range from 6 months to a year, while longer term CDs can have lengths between 15 months to 5 years or more. BankFive offers CDs in 6-month, 1-year, 18-month, 3-year, and 5-year terms, with a minimum deposit requirement of $500. BankFive also offers a special 2-year Investment CD that requires a minimum deposit of only $100, and allows you to make additional deposits at any time with as little as $10.
While CDs can be a safe and solid investment tool, there are some common mistakes with CD investing that could end up costing you. Here are some tips to help avoid them:
• Think twice before committing to long-term CDs. Generally, the longer the CD term, the higher the interest rate. Before locking in that attractive rate with a 5-year or 10-year CD however, you should do your homework first. The last thing you want to do is commit to a lengthy CD right before the Federal Reserve increases rates. It’s a good idea for CD investors to keep an eye on Federal Reserve news headlines to understand when rates might fluctuate. The Fed’s rate-setting committee meets eight times each year to decide whether or not it will modify the federal funds rate.
It’s also important to note that significant increases in CD rates typically occur over the course of several years. Tying up your funds over a long period could prevent you from taking advantage of CDs with higher yields if they become available further down the road. While it’s possible to pull your funds out of a CD before it matures, doing so usually results in penalty fees – which can take a real bite out of your interest earnings, and in some cases even your principal!
• Don’t fail to diversify your CD investments. Although “diversifying” in the investment world typically means having different types of investments such as stocks, bonds, and CDs, you can also diversify your CD investments specifically.
This is where CD laddering comes in. Basically, CD laddering is when you set up multiple CDs that will mature at staggered intervals, so you will have access to your CD funds on an ongoing basis. CD laddering typically involves a mix of short and long-term CDs, so you can reap the benefits of longer terms with higher rates, while still having other CDs maturing on a regular basis.
• Don’t forget to shop around for the best rates. There are plenty of financial institutions out there offering CDs. Whether you’re more comfortable putting your funds into a local, regional, or national bank, it pays to evaluate a few different financial institutions to see what CD rates they have to offer. Trying out the bank down the street instead of the bank you have your checking account with might make sense if they’re offering a more competitive rate. Be sure to ask your bank about any CD specials they might be offering too!
• Know when your CDs are maturing. Once your CD matures, you have a chance to withdraw your funds, or move them to another CD or investment. This is a great opportunity to see if there are higher rates available for your savings. If you don’t step in and inform your bank what you’d like to do with your CD however, they will typically automatically roll your funds over to a new CD term.
If this happens, you could miss an opportunity to invest in higher-yielding CDs or take advantage of other investment options, such as stocks, that could provide stronger returns. While there are certainly scenarios where it might make the most sense for you to roll your funds into a new CD with your existing bank, it should be a decision you make based on your current financial picture. Don’t let your bank decide for you!
By keeping these tips in mind, a CD can be a worthwhile and fruitful investment. Always remember though that it’s best to consult with a tax advisor before making any major financial decisions. For more information about CD accounts at BankFive, visit https://bankfive.com/Personal/Save/Certificates-of-Deposits-(CDs)