Certificates of deposit or CDs are suitable for people of all ages. A CD is a low risk investment to deposit your cash that you do not want to use immediately. This type of investment can give you a better return rate as compared to a checking account.
Maybe you want to make a down payment for a home or want to use your money to purchase a car later on in future. At such times when you do not require your cash reserve for some time, you can invest in a certificate of deposit and get better return rates.
Plus, a CD offers much less risk, which makes this type of investment quite useful. But, before you decide to do CD investment, there are two factors that you must consider. These factors will let you know if investing in a CD is the right thing to do for you or not.
Your time horizon
This refers to the time when you will need your cash, whether all or just some part of it. This also means that you should consider whether you have other cash assets that you can access when you require cash. If you have some amount of money and you know that you will not require it for 6 months or longer, then you can invest in a CD.
You should consider the interest rates that you will get on a CD. The expected direction of rates of interest on a CD will assist you in determining the amount of time that you can keep your money in a CD. If the interest rates are rising, which is generally when inflation is rising, then it is best to invest in a short-term CD. If the interest rates are falling, which is typically when the economy is declining, then it is best to invest in a longer-term CD, which will help you earn more money through a higher rate of interest.
How to do CD investment
Before you invest in a CD, there are two important things that you must know. These are:
- Annual Percentage Yield (APY): The APY of a CD tells you the amount that you will earn over several years of the life of a CD, while your money compounds.
- Annual Percentage Rate (APR): The APR of a CD is the annual rate of interest that a bank offers on the CD.
If you do not know want is compounding, then let me tell you that compounding refers to how your investment increases over time. For instance, if you invest $10,000 in a CD of three years in which you earn 5% interest rate per year, then in the 1st year, you will earn $500 on your investment of $10,000.
Then, in the 2nd year, you will earn $525 on $10,500 and in the 3rd year, you will earn $551 on $11,025. This is how your investment will grow each year with an increase in your principal investment. This is called compounding. Now, that you have finally chosen that you need to do CD investment, this is what you must do.
- Select your term
The first thing you need to do is to select the term of your CD, that is, the amount of time you want to tie your cash in a CD. In this decision, you need to consider when you require your money in near future and whether you have other money resources with you that you can use till your CD matures.
- Choose your type
The next thing is to decide in which type of CD you want to invest. This depends on which CD suits you the best. For instance, if you want to invest your money for 2 years and you do not want the risk of low interest rates, then you can opt for a bump-up CD. If you think that you may need some part of your money for an urgent situation in future, then you can opt for a liquid CD.
- Review interest rates
Next, you need to review the interest rates of the type of CD you want to invest in. This includes checking out the different interest rates offered by different banks. Once you see this, you must go for the best interest rate on a CD.
This is how you can do CD investment. Hope this article helped you and if you want to know more about CD investment, you can leave your comments below.