PrintLike most investment options, certificates of deposits (or CDs) have their place, and there are reasons why investors will select them. While they are not among the more attractive, potentially high yielding investment possibilities, they do pay slightly higher than most bank or credit union accounts.
Typically, CDs are good investments for short-term goals. For example, as paying college tuition becomes a closer reality, an investor may take his or her money out of mutual funds, or other high-yielding riskier investments, and start buying CDs for safe keeping. The investment principal is, therefore, safe and gaining interest.
The key to buying CDs is planning properly. CDs can be purchased for any number of timeframes. Therefore, determine when you will need the money and time the investment accordingly. Just make sure you look closely at the maturation date of the CD. Confirm that the CD you are purchasing matures in six months, one year or whatever timeframe you are seeking. Since CDs have penalties for early withdrawal, you want to leave the money in the CD until it matures.
The one major drawback of a CD is that it lacks liquidity, since the money must remain in the account until maturity. However, by purchasing a few CDs (and you can usually buy them at fairly low amounts, such as $1,000), you can ladder them, meaning you buy several that mature at various times. For example, if you purchased CDs every other month for six months, you will then have the interest from one coming due every other month. Although you will purchase some at higher rates than others, you should not worry, because like dollar cost averaging, you will be getting the average rate. For income during retirement, laddering CDs is also advantageous, particularly once you have to start withdrawing money from other types of retirement vehicles.
CDs are generally purchased through banks, credit unions or brokerage houses. Shop around and look for the best interest rates. Also, determine if the interest is fixed or variable and how often it is paid. Like other types of investments, CDs, once a very simple investment, have become more complicated as a myriad of choices has arisen. You need to read the terms very carefully. For example, some long-term CDs can be called, meaning that the issuing bank can terminate, or "call" the CD after a set period of time. If interest rates fall, the issuing bank might call the CD. In that case, you should receive the full amount of your original deposit plus any unpaid accrued interest. You will, however, have to deposit the money in another CD at a lower rate. Therefore, it is in your best interest to look for non-callable CDs.
It is always important that you keep some portion of your money in safe havens, and CDs can be those safe havens, particularly if you can afford to buy several and ladder them.
