3 Year CDs
A 3 Year Certificate of Deposit (CD) is a bank time deposit that is FDIC insured up to $250,000 and has a 3 year maturity date. At the end of the 36 months your monies are paid back including interest. These 3 year investments pay a higher rate of return then money markets or savings accounts and are popular with a more low risk investor. CD Rates are simply the rate of interest a bank will pay you for your investment.
In bad economic times, it is often advisable to lock your monies up in low risk options such as a 3 year CD. Although, you won’t get rich with these investments, when things get tough you should really be focusing on preservation of capital and earning interest on your investments is just a bonus. A 3 Year CD is a great option for investors who don’t mind locking up their funds for 36 months.
A CD is the common name for a certificate of deposit, and it differs from a savings account in several ways. You can withdraw money from a savings account whenever you want without a penalty, and you can add any amount of money to a savings account any time as well. However, the interest rate for a savings account is usually lower than the rate for a CD. When you have money that you will not need for a while, you can earn more interest if you invest it in a CD. When you deposit money in a CD, you consent to leave it for a particular number of days, months or years. If you need some of the money, or all of the money, before the time is up, you will have to pay a penalty on the amount you withdraw. CDs invested for more than a year usually have a penalty of at least 180 days loss of interest. If your early withdrawal penalty is 180 days interest and you withdraw funds less than 180 days from the time you deposited them, you may lose some of the principal as well. Most CDs renew when they mature unless you notify the bank before the maturity date that you want to take the money out of the investment or change its terms. Taking money out of a CD at its maturity will not incur a penalty.
Deposits with 3 year CD rates may be good investments if you believe interest rates will not go up very much in the next 36 months. However, if they should rise dramatically, you can withdraw money from your investments with 3 year CD rates and pay the penalties, which should be reasonable because you purchased them when the rates were low. Then you can invest in CDs with higher rates. If the rates are considerably higher than when you purchased the CDs, it will be worthwhile to switch because you will make up for the penalties in a short time and start reaping the benefits of higher rates.
How CD Interest is Earned
If you plan to use the interest earned on your CDs and receive a monthly check or deposit to your checking or savings account, you will earn the 3 year CD rates quoted on them. However, you can choose to let them compound and earn more interest throughout the term of the CD. When a CD compounds, the interest it earns deposits back into the CD, and you earn interest on that amount in addition to what you earn on the principal amount. Each interest payment is greater than the last one because the principal amount goes up every time the CD compounds. Compounding makes the effective rate higher than the quoted rate, and we call that effective rate the annual percentage rate (APR).
You will be committing your money to a three-year term, so use caution when comparing banks, rates and terms. You may find a CD with a high interest rate, but the early withdrawal penalty may be unreasonable. There may be other unfavorable conditions as well, so do not compare only interest rates, but evaluate all the terms to get the best CDs to meet your needs.
Government agencies insure the money in US banks, so your CDs are safe with them. The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 for each depositor, so you have the assurance of knowing your money is secure when you invest in CDs, and security may be more valuable than higher returns.
Three-year CDs may be a wise choice for investors who want to earn more than they can with short-term CDs but do not want to tie their money up for a long time. Today’s economy does not show signs of improving very soon, so three years may be about the right time for a CD to mature. Hopefully, the interest rates will be higher by then, and you can invest in CDs that have better interest rates.