Should I Get a Certificate of Deposit?
A year ago, I decided that as a birthday gift for myself, I would get a one year certificate of deposit. After doing a little research, I found one that offered a 2% interest rate for a minimum deposit of $2,000. Well, I definitely wasn't going to make a fortune with this rate, however, I knew for one year I'd have $2,000 put away that couldn't be touched (without a penalty) and it would grow a little during that period. Since penalties are a no-no, I moved forward, confident I would not touch that money for a year.
Let's look at my example from earlier. I started with a $2,000 CD with an annual percentage rate of 2% (APY), for one year. After 1 year, the CD totals $2,040. So I made $40 in interest after one year. That's roughly $3.33 a month in interest ($40/12)...ouch! So again, not going to become a millionaire, but CDs are a safer investment tool that could be part of your overall financial portfolio.
What is a Certificate of Deposit (CD)?
A certificate of deposit is defined as "a certificate issued by a bank to a person depositing money for a specified length of time." The money earns an interest rate premium in exchange for investing for that set period of time.Should I get a CD?
Perhaps you have a little extra money sitting aside and you are trying to figure out what to do with it. If all your bills are paid, your emergency fund is fully funded, and you won't need the money immediately, a CD could be an option. Rates are typically quite low and depending on the amount deposited it may or may not make sense.How much will I earn?
The amount of interest you will earn will depend on the interest rate for the cd, the amount that you deposit, and the length of time until the CD matures. There are lots of CD Calculators available online that can help you calculate your total balance at maturity. Try the CD Calculator at Bankrate.com.Let's look at my example from earlier. I started with a $2,000 CD with an annual percentage rate of 2% (APY), for one year. After 1 year, the CD totals $2,040. So I made $40 in interest after one year. That's roughly $3.33 a month in interest ($40/12)...ouch! So again, not going to become a millionaire, but CDs are a safer investment tool that could be part of your overall financial portfolio.
What happens once the CD reaches maturity?
When you open a CD you are given a date when that CD will mature. That is the date when you can take money out of the CD without any penalties. Since I purchased a one year CD, my CD's maturity date was set for one year later. What happens once the CD reaches maturity will depend on the financial institution, but usually, you can either roll it over another year at the same rate (happens automatically at maturity unless you close), or you can close the CD and get your money back and the interest.Final Thoughts
A CD is just one financial vehicle that could be used to help you meet your financial goals. While CDs may be great for some, it may not be true for others. Right now rates are extremely low. If you're interested in opening a CD, I recommend you research now to learn more and look at opening one later as the economy strengthens. While 2% is low, I found that the same exact CD is right now earning .20% interest for the same term. That's $4 over a year...PASS! 😂