A certificate of deposit (CD) is a type of investment where you put money into an account, it accumulates interest, and at the end of the term you cash out your funds. If you decide that a CD seems like the best investment option to you, then you need to decide what kind of CD you want to get. There are many different types, but the first thing you need to figure out is how long you want to invest in the CD. As you will read below there are advantages and disadvantages to both short-term and long-term certificates of deposit.
Short-Term CDs
A short-term CD is generally one whose term falls between three months and a year. These types of CDs are a good option for new investors because the quick turnaround allows them to see how efficient the CD is. The downside is that these CDs will not be able to earn a lot of interest because of how short the term is. The upside is that you will have access to your money sooner (which means being able to reinvest sooner) and not have to worry about withdrawing early and incurring penalties.
Long-Term CDs
A long-term CD has term lengths anywhere from two years to thirty years. The biggest advantage is that the longer the term is the more interest you will be able to accumulate. The disadvantage is having your funds tied up for an extended period of time. You should only invest in a long-term CD if you have emergency money set aside and are positive you will be able to cover any unexpected circumstances that may arise. If for whatever reason you have to withdraw the funds early you will be burdened with heavy withdrawal fees.
Other Factors to Consider
Another option you have to consider is how much money to invest. Most people will have to decide between investing a large amount of money for a short time, or a smaller amount of money for a long time. To get the most out of their investments some people choose to create a CD ladder. The basic strategy is to invest multiple amounts of money in accounts with different term lengths. For example, you could invest $20,000 for two years, $10,000 for five years, and $4,000 for ten years. This may make things more complicated, but the differing intervals give you more flexibility and control over you investments. While your funds are in the CDs you can be keeping track with the market rates, and if something better comes along then when one of your CDs matures you can transfer the funds over to the better account.
In Conclusion
Whether you decide on a short-term CD or a long-term investment you will want to compare offers from different lenders before choosing one. This will insure that you are getting the very best returns for your money. CDRates.org offers a great tool for this. You can choose which type of CD you want and then it will show a list of lenders and the APY, interest rate, and minimum deposit requirement of each. This is a great place to start your search for the very best CD rates!