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CD’s - A Super Savings Account

In the last couple of months we have been introducing some investment plans to help you save for the future. Certificates of deposit (CDs) are another savings plan with little risk and a good return.

Certificates of Deposit are a good form of investing as long as you know that you are not going to need the money before the time period has ended. You give the bank a certain amount of money for an agreed upon amount of time. The time frame usually starts with at least 3 months and can be longer than 2 years. The bank agrees to give you a larger interest rate than what you would receive from a regular savings account.

If you need to break this contract before it matures you will have to pay penalty fees. The fees are different and based on length of time, interest rate, and other factors that were previously agreed upon.

CDs are a zero-risk investment and are also insured by your bank or credit union the same way your savings are. The Federal Deposit Insurance Corporation (FDIC) insures banks while the National Credit Union Administration (NCUA) insures credit unions.

Many institutions offer fixed rates for CDs. Generally, you will get higher interest rates for your willingness to invest more money and agreeing to longer termed contracts. Sometimes smaller banks will offer higher interest rates to attract customers.

Your institution will notify you by mail or electronically shortly before the CD matures. Once the CD matures you have some options on how you want to handle the money and accrued interest. You can withdraw the principal amount along with the interest. They will also transfer this amount into a checking or savings account for you if you request it.

You can also roll the total amount over into another CD. It is common for a bank to automatically roll it over into another CD if they have not heard anything from you. Even if you want it to rollover you should notify the bank so you know that you are going to get the best interest rate. Some banks may automatically roll it over but with a lower interest rate than what the current market rate is.

Before you purchase a CD the bank is required to provide you with the terms of the agreement. This is called a “Truth in Savings” booklet. You can have the bank mail it to you, or you can download it online, or go into the bank to get one. It is important to go over this thoroughly as it will state any conditions, limitations, or obligations required by you and the institution.

There are also CDs that are a combination with an IRA. These can be beneficial for tax purposes and can be discussed with your personal banker if they feel that this would be a choice for you.

There are some limits when it comes to CD accounts. The FDIC insures accounts up to $100,000. Many banks have a minimum of $1,000 deposit to start a CD account, though this differentiates between banking institutions.

There are different types of CDs that a banker can discuss with you. There is the traditional which is what we have introduced in this article, there is also the bump-up, liquid, zero-coupon, callable, brokerage, and high-yield. Again, a personal banker can explain these in more detail and determine if one of these other versions may benefit you more than a traditional CD.

CDs are a great low-risk investment and a good way for your money to grow. Even though it is similar to a savings account it cannot be trusted as one because of the penalties. It is a good idea to still have a healthy savings account to be there for you in case of any emergencies. If you have any questions or are interested in CD investments set up an appointment to speak with someone from your bank.

RESOURCES

www.bankrate.com - a great online resource that can answer many of your banking questions.

www.moneycentral.com - MSN’s website that has many advice and strategy articles written by acclaimed financial experts.

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