Certificates of Deposit--Good or Bad Idea?
When creating your investment plan, have you considered investing some money in a Certificate of Deposit, or CD? Put simply, a CD is a financial product that works similar to a savings account. The difference is that when you invest in a CD, you put all of your money in at one time, rather than a little at a time. Withdrawing your money will depend on the length of time you buy, ranging from six months to five years or more, when depositing your money. In return for your money, the bank pays a set amount of interest determined by the market at the time. Penalties will be applied if you try taking out your money before the CD matures.
CD Advantages
A well thought out investment plan will include growth, stability and income-producing investments. CD's are in the stability category, because they offer little to no risk to your money. While you will not see large returns, you will also not see large losses. Your return is guaranteed and disclosed to you when you purchase the CD. Your money will be there when it matures, or comes due. This is due to the fact that these are insured by the FDIC--the same agency that protects your checking and savings accounts, should there be another Great Depression.
CD Disadvantages
The downside of a CD is that they do not give you a large return on your money. A large sum of money at maturity is not likely to happen, even if you purchase a 15 year CD. You can, however, see a larger return from buying a bond. But if you need a variety of stable investing options, a CD is a good place to hold your money.
Variety of CD's
Just as there are a multitude of investing options in the stock market, so there are a multitude of options when it comes to CD's. The main options are as follows:
--Traditional
This is where a fixed amount of money is invested at a pre-determined interest rate for the amount of time you purchased them for. High penalties are charged for early withdrawal.
--Bump-up
These give you an option after a certain length of time to earn a higher interest rate, if the rate has increased during that time.
--Callable
Banks can "call back" your CD after the call-protection period ends, and re-issue you a new one at a different rate. The reason behind this is if you are earning 5% on your CD, but the bank begins paying 3% on their CD's, they can pull yours back, and reissue the CD back to you at the lower rate.
--Liquid
These actually give you more freedom than the traditional CD's, because once you get past the government mandated 7 day waiting period, you can take out money without penalties. However, the drawback on this is that you will end up having to take a lower interest rate than you would with other options.
--Brokerage
This just means that these CD's are sold through your broker's firm. While they are still insured by the FDIC, they act more like bonds, because they have higher interest rates. Sometimes, banks will use brokers to sell CD's on a national scale, so the interest rates must reflect the national rate. You can also take out money before the maturity date without penalties.
Bottom Line
You want to keep the money you have, while perhaps seeing some nice growth as well. The key to building your nest egg is to split your money into a few well-researched categories. Growth stocks, bonds and money market accounts are the three main categories that should house your retirement money. CD's are meant as a short term method to holding your money and protecting it from the fluctuations of the market, which is what you should use them for.
A good strategy would be to put one-third of your money in each category. this will allow you to earn a large return on some money, while protecting the other two-thirds of your money. Use the interest payments from your bonds to pad your stock investments. Your money will then earn more money, giving you more for your retirement.