Sitting on a stash of cash? Putting it into a certificate of deposit (CD) can be a great way to keep your funds safe, while earning a tidy interest rate.
Horizon is currently offering one of the best interest rates in the nation on CDs!
In exchange for an interest rate higher than money market or savings accounts, your funds are a wee bit less accessible, since it’s locked up for the term of the CD unless you want to pay a penalty, but you’ll earn a better interest rate. Plus, it’s less risky than most other forms of investment, thanks to federal deposit insurance up to $250,000.
Typical types include short-term CDs, long-term CDs, variable term CDs and jumbo CDs, and terms often range from one month to five years.
Interestingly enough, most CDs are purchased by wealthy, retired investors, according to a study by the Federal Reserve.
So how do you choose the right CD for your cash?
1. Decide how much you can afford to let it sit untouched, and for how long.
The percentage rate of a CD is largely determined by two factors: how much you invest, and how long the term of the CD is. Less cash for short amounts of time earn a smaller rate of interest, and larger sums of cash left in the CD for a year or longer earn more.
Figuring out how much to invest is easy for most people, but the term of the CD can be a bit more difficult. Since penalties for early withdrawal can eat up your interest earnings and more, it’s best to be conservative.
2. Consider liquidity.
Not only is length of term important, but specific details behind liquidity matter. Since CDs are designed to be hands-off, penalties can be steep. It’s important to look at terms of the CD before deciding which one to do.
Can it be cancelled? Will you lose just interest, or interest and principal? Can your withdrawal request be refused entirely before its maturity date? Are there specific circumstances that might cause penalties to be waived, such as a family emergency?
Be sure you thoroughly understand and are comfortable with all details before you commit.
If you have misgivings, instead consider CDs with a lower yield, a variable rate CD that allow more activity, or other investment opportunities such as money market accounts.
3. Understand what happens when the term ends.
While reviewing disclosure and terms of the CD you are considering, take a close look at how the bank handles your money once the term of the CD ends.
Do you have a specific time frame to withdraw your funds before it automatically rolls over into a new CD? Will they contact you during that withdrawal period, or is it entirely up to you to remember it? Are there “call features” that allow the bank to terminate the CD if interest rates fall, or other reasons? What circumstances can trigger the bank’s call to cancel? (the call period is different than the maturity period) How is the interest paid out?
4. Look at the flip side: impact of your investment
One topic is rarely discussed but critically important: how are your invested dollars going to be used? Considering how funds can help your community allows you to make a difference as an investor. Why not choose a bank that intends to use the funds locally?
As a depository function, CDs are a great way for a bank to build up funds at their disposal. If that bank is a small community bank, like Horizon Community Bank, those funds might be used to fulfill small business loans within your community.
Why not ask? It gives you a feel-good benefit not offered by large chain banks. Your money is sure to stay local.