Use a CD to start your savings
What is a certificate of deposit?
A certificate of deposit, or CD, is a contract between you and your financial institution where you deposit a certain amount for a fixed period of time. For example, deposit $1,000 using a CD for x interest and for x months. The idea is to keep the money on the CD; thus, you hold it to maturity and collect principal and interest.
What is the purpose of a certificate of deposit?
A CD represents a type of savings account; thus, if you want to improve your personal financial plan, you can start with a CD. However, I must mention that since it is fixed, you might be better off having a savings account first and then a CD. Having a CD helps you plan for mid- and longer-term goals.
How can I obtain a certificate of deposit?
Several financial institutions offer CDs with several maturities and with interest rates that are higher than savings accounts. If you plan to sign up for a CD, make sure to review the maturities. Having the money available when you need it, without any penalty, should be planned carefully.
What are the benefits of a CD?
Certificates of deposit have certain benefits that you must consider:
- Higher interest rate than a savings account.
- A larger principal might obtain a better interest rate.
- Various maturity dates help plan for availability of funds.
- FDIC insured, the majority of financial institutions offer this.
- Signup typically starts at $1,000.
- No fees or service charges.
Some disadvantages are:
- Fixed terms: If you request the money before maturity, you get penalized.
- Sign up for something larger than a savings account.
Do I have alternatives to a CD?
Financial institutions offer various savings and short-term investment alternatives to CDs, such as:
- Savings accounts
- Money market account
- Certain mutual funds (riskier)
How do I improve my financial plan?
Improving your financial plan should allow you to put money in a savings account. Start by committing funds for saving; then, work your way up to an amount that allows you to sign up for a CD. Make sure that you maintain at least six to nine months of your basic expenses in your savings account. Then get one or more CDs with different maturities so you can maximize the interest earnings while keeping those funds safe. Remember, these funds represent your safe harbor in case of an emergency.
Conclusion:
A Certificate of Deposit (CD) might help you improve your financial plan. CDs provide higher interest earnings, but you have to commit for a fixed period. Therefore, you should carefully plan your CDs so you do not withdraw the funds early. You should consider CDs since most of them are FDIC insured.
Please add some comments or requests for new material. I want to improve your site experience and keep you as a regular visitor.