Hello Folks,
This posting is on a bread and butter financial product: Certificates of Deposit. Whether you are shopping for a CD or just want to know more about them here are some points to keep in mind.
First, CDs are essentially debt instruments issued by banks that carry interest. They are attractive for a number of reasons; primarily because they have security and pay interest. CDs are more secure places to stash one’s cash than stocks or corporate bonds primarily because they are covered by FDIC protection. However, in return for this level of security you typically receive an interest rate somewhat better than cash, but not as good as yields on corporate or municipal bonds.
CDs come in varying maturity levels. Maturity rates are important because they impact your financial planning. If you need your money relatively soon – say in the next three to six months – you might consider an alternative to a CD such as a savings or money market account. If you have a longer term goal, CDs may be appropriate. A good example of when might be the right time to buy a CD is when you are saving up for something like a house down payment. You will have to save quite a chunk of change, but you also don’t want to get stuck with a low interest rate. In this case, CDs are a good way to go.
Another example would be putting your emergency fund into a set of laddered certificates. Laddering is a technique of buying CDs with various maturing lengths. For example you might purchase some CDs with 3 month maturation dates, some with 4, some with 5, etc etc. This means that at on any given month you would have some CDs maturing, allowing you free cash in case of emergencies. By keeping your money in CDs you could also be earning a relatively higher rate than alternatives like a checking or savings account. Thus, laddering allows you to kill several birds with one stone.
Once you’ve determined that a CD is right for you, it is necessary to do your homework and find the best bank CD rates. Rates can vary from bank to bank, so it pays to shop around.
Finally, despite some improvements, current economic conditions are encouraging banks to behave badly towards their customers. Here are three things to keep in mind.
1) Many account agreements allow banks to seize your funds if you fall behind on a loan. Therefore, it is also wise to consider having your CDs in a bank separate from your mortgage or car note. Some banks have the policy that if you were to fall delinquent on your loan payments they would be able to seize your CD.
2) Your bank has the right to hold on to your CD account and prevent you from withdrawing your funds in the event of a possible bank run.
3) Be aware of the renewing policies for your CDs. It’s possible for a bank to roll over your CD at very low rates without telling you in advance.
Happy Saving,
Miel&James
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