5 Year CDs
5 Year CD’s are long term investments which mature 60 months after the date of deposit. These low risk investments are great for individuals or institutions with excess cash that are looking for a low risk investment vehicle. 5 Year CD’s allow for investors to earn a higher CD Rate because the monies are compounded and the bank has more flexibility to use your monies in their other activities.
A 5 Year CD is a perfect option for investors that don’t need to be liquid or for prospectors who think interest rates will fall over the next 5 years. This is true because once you lock in your rate; you will be paid that rate of interest even if the current interest rates continue to decline.
Description of CDs
Most people call certificates of deposit CDs. CDs usually require an investment of at least $500 while the minimum balance in a savings account can be much lower. Money invested in a CD typically earns a higher rate of interest than that in a savings account, but it must remain in the CD for a certain amount of time. You will usually have to pay a penalty if you withdraw the money, or some of the money, before that time expires. A typical penalty for withdrawing from a CD with a term of more than a year is 180 days of the interest earned. If the CD has not yet earned that much interest, you will have to pay the remainder of the penalty from the principal. On a CD’s maturity date, it usually automatically renews for the same term with a new rate that coincides with current rates. If you give the bank notice that you do not want the CD to roll over when it matures, you can withdraw the money or invest it in a CD with a different term at that time. You will not pay a penalty for withdrawing or changing a CD at maturity.
Investments with 5 year CD rates have some of the longest terms available and have some of the highest CD rates as well. You can lock in one of the highest interest rates offered now when you purchase certificates of deposit with 5 year CD rates. Even though the rates may go up quite a bit before your certificates mature, you can forfeit the early withdrawal penalty and withdraw the rest of the funds in your CDs to deposit in CDs with higher interest rates if that happens. By doing that, you will still earn more money than if you had originally invested in short-term CDs with lower interest rates.
In addition to deciding how long to tie up your money in a CD, you can determine how your interest is paid. You will earn more money when you choose to let your CD compound. Banks usually let you withdraw the interest from a CD with no penalty and will mail you a monthly check or deposit the interest into a savings or checking account for your immediate use. However, if you do not need the income, you can let the interest accumulate in your CD and earn more because your CD balance increases every time it compounds. Therefore, CDs that compound more frequently have higher annual percentage yields (APYs).
Early withdrawal penalties are much higher at some banks than at others, and there may be other conditions in certain CDs that make them bad choices for your situation. When you compare rates and terms to choose the CDs you want to invest in, read all the conditions carefully, so there will not be any unpleasant surprises later.
CDs issued by US banks are safe, so depositors can feel secure in putting money in them. They may find investments that pay higher returns on their money but do not have a guarantee, so they have a risk of losing some or all of their initial investment when they choose them. The Federal Deposit Insurance Corporation (FDIC) insures $250,000 of the funds in a US bank depositor’s account, so CDs offer a secure method of saving for those who dislike taking risks.
Five-year investments may be wise choices simply because the 5 year CD rates are about the best you can get when you do not have the amount of money it takes to purchase a jumbo CD. Since the rates in today’s economy are lower than previously, if the economic situation improves significantly in several years, you will not incur a large penalty to withdraw the funds from your CD with a low interest rate, so you can reinvest them in a CD with a much better rate.