Tuesday, December 13, 2011

Are CDs A Good Savings Option


Certificate of Deposits (CDs) are available at most banks and credit unions. Some banks offer high interest rates for CDs than checking accounts such as Doral Bank, Discover Bank and MetLife Bank. Most CDs require a minimum balance of $1,000. A few banks require lower minimum balances such as Astoria Federal Savings and Citizens Trust banks however, they offer lower interest rates.

Banks make money with deposits from customers for savings and checking accounts, CDs, money market accounts, etc. and use that money to offer loans to individuals or businesses.

When you commit to a savings period of months or years, the bank loans your money since you don’t need it right away. Customers benefit from opening a CD account by earning more money from a higher interest rate. Customers who need to quickly access money do not benefit from opening a CD account. The pros of opening a CD account are:

1. The higher your deposit the higher interest rate you qualify for.
2. FDIC or NCUA insured.
3. Easy to open with usually a small amount, i.e. $500.
4. Offer different terms and interest rates.
5. Receive 100% of your initial investment plus interest earned.
6. Fixed interest rate.
7. Low to no risk.
8. You know how much you will earn.
9. Maturity periods range from 3 months to 5 years or longer.
10. Offers multiple savings methods such as laddering, step up and bump up.
11. Variable CDs have an interest rate that is tied to the stock indexes, if the indexes rise your interest rate increases.

The cons of opening a CD account are:
1. Interest rates may change.
2. If you need your money before the CD matures you will have to pay a penalty fee.
3. If you withdraw money before the CD matures your interest rate may be reduced.
4. Treated as a taxable investment so you pay taxes when the CD matures. You will pay federal, state and local taxes when the CD matures. For longer term CDs with higher interest rates you could pay more in taxes.
5. Interest rate may not keep up with inflation.
6. Earns less than the stock market.
7. Is not an investment vehicle.
8. If you choose a longer maturity and higher interest rate for a variable CD, you will lose access to funds and alternative uses of funds.
9. Interest rates are usually lower than a checking account but higher than a savings account.
10. You can’t make transactions.
11. You have to wait a specific time period to earn interest on your money.

Comparison shop to find the best deal for you at sites like www.bankrate.com/cd.aspx.

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