A certificate of deposit is a low risk investment and gives higher returns than saving accounts. It operates by taking a certain amount as investment for a fixed period that can be anything from one month to even more than five years. CDs are issued by banks and the Federal Deposit Insurance Corporation (FDIC) insures them up to $250,000, which means they come with a guarantee from the U.S. government.
The minimum deposit that has to be made in a CD is usually around $1,000. An important feature of these deposits is that in return of locking your money for a fixed period, you get a higher rate of return. If you withdraw your money before the term of the CD, then you might lose a large part of the interest as withdrawal fees. For example, the penalty can be a deduction of about six months worth of interest or a reduction in the rate of interest paid out.
The rate of interest that you earn on a CD varies with the time period for which the money is deposited and to the amount of deposit. At the time of making the investment, you will be given a certificate, which states the interest rate, the deposit period and the date of maturity. On the date of maturity, you will be repaid the principal amount along with the interest earned.
Some people like to use a technique known as a CD ladder, where they can keep their money invested, while having access to it after regular intervals without incurring a penalty. You can build a CD ladder by buying CDs of different time periods. After every period, one of the CDs will mature, which can be used to invest in a longer term CD that will pay higher returns.
Another benefit of CD investments is that they help you in saving money for emergencies. They prevent you from spending extravagantly as they keep your funds locked. A CD will give you good returns, and if you face an emergency, you can access your funds by paying a small penalty.
You can look for various CD schemes available with banks and get information about interest rates online. Search for a bank that is listed with the FDIC so that you get insurance on your deposits. A CD is a good option for making a safe investment that gives high returns, so always include it in your portfolio.