Building savings is a tough task and it takes a lot of patience to collect those funds for the betterment of the future. Savings can be made in different ways. Some people cut costs to put some money away to save, while some people try and earn extra every month to build some savings.
This process is extremely personal and varies based on the type of earning, the amount of earning, and the saving psychology of an individual. The banks help you in building a balance through Certificate of Deposit, CDs.
Read on to know more about CDs.
What is a CD?
A Certificate of Deposit is a certificate issued in exchange of a deposit made in a CD account. This deposit is kept in the bank for a fixed time period and earns a fixed interest rate from the bank. The CD is given a maturity date after which the money can be withdrawn. The withdrawal money is the initial money deposited plus the interest earned on it.
When a Certificate of Deposit is created, the money deposited in the account is locked away for a certain period of time and can be withdrawn only after paying a fine. These deposits are issued by most commercial banks and insurance from the Federal Deposit Insurance Corporation (FDIC). The rate of interest on CD varies from bank to bank.
Types of Certificate of Deposit
CDs are basically divided into three types; small, large, and jumbo. CDs lesser than $100,000 are called small CDs while CDs above $100,000 are called large CDs. Jumbo CDs are the CDs that have a huge amount and every bank defines the amount differently.
CDs come with a lot of terms and conditions and one of them is the minimum investment requirement. Also, the term of a CD ranges from six months to five years and this again depends on the financial institution.
Advantages of CDs
There are many advantages of starting a CD along with the basic fact that it helps in building wealth. Following are few important advantages.
- Flexible terms
The amount of a CD and its term are flexible. You can choose how much money you want to lock away for a fixed time period. If you do not want a long-term period, you can choose a short-term period, and renew the CD when it matures.
CDs are FDIC-insured. This means the money you place in the bank is insured. FDIC insures CDs up to the amount of $250,000.
- Better interest rates
CDs provide a better interest rate as compared to the savings account. The money kept in CDs is valuable for the banking sector and hence, to encourage people to create CDs, banks offer a good interest rate.
Banks offer a lot of variety in CDs. They come in various combinations of terms and interest rates. So, a customer gets a lot of choice with the CDs.
- Fixed Returns
The interest rate on CDs are pre-decided. So, a customer knows exactly what amount he/she will get after the CD matures. This kind of clarity helps in future financial planning.