Busy families work hard, so it’s important that your money works hard for you too. If you’re trying to save money, figuring out how to get that money to earn interest can sometimes be challenging. Bank savings accounts are good starting points, but to truly make your money grow you need something that provides a larger financial return. Stocks, on the other hand, are notoriously risky and can wipe out all of your hard-earned savings efforts in seconds.
The CD, or certificate of deposit, is a great way to help your savings grow without taking on additional financial risk. If you’re looking for a way to expand your financial resources in 2014, investing in CDs is a solid, smart choice.
Everything you need to know about CDs
When you purchase a CD, you are agreeing to loan your money to a bank for a specific period of time. Just like you pay interest on the money you borrow, banks also pay interest on the money they borrow from you. A CD literally means you receive a certificate for depositing your money with the bank, under an agreement that you will receive your money back after a specified period of time, with interest.
It’s the interest that is the great part about CDs. Each fixed-rate CD comes with a guaranteed interest rate, meaning that you know exactly how much money you get at the end of your lending term. Other investments, from Roth IRAs to 401(K) plans, do not come with guaranteed returns; the investment you make could earn money, but it could also lose money. A CD is guaranteed to earn you a specific amount of money.
The amount of interest you earn from a CD is called the CD rate. Current CD rates are extremely favorable to lenders, meaning that it is a great time to make CD investments. The longer you are able to lend your money to the bank, the higher CD rate you receive. Find out about Discover Bank’s current CD rates and note that, according to their site, a longer-term IRA CD will earn you the highest CD rate.
Term lengths and CD ladders
Of course, loaning your money to the bank means you won’t be able to access your money until the CD comes due. Many people solve this problem by creating what are called “CD ladders,” in which they purchase multiple CDs at various term lengths, making sure they have money coming back to them every six months, for example.
The way you purchase CDs will depend on your family’s financial needs; if you anticipate needing savings for a family vacation or an upcoming move, you’ll need to purchase CDs with specific term lengths so that the funds will be ready for you when you need them.
If you’d like to make a truly long-term, secure investment, it is possible to buy a CD with a 10-year term length, meaning that after a decade, your family will receive a large amount of interest when your loan is returned.
In case of emergencies
In the case that you have a true financial emergency and need the money right away, it is possible to break your agreement with the bank and get your loan back early. Expect to pay a penalty for breaking this agreement. It is much better to plan ahead and build a CD ladder than it is to purchase a CD and then break it, but we all know that families can’t always predict when they’ll need their savings!
Another way to avoid breaking your CDs is to make sure you always keep a baseline emergency fund in your savings account. That way, you always have money for small emergencies and only need to turn to your CDs if you experience a true financial crisis.
Protecting your money with a safe investment
If your CD is FDIC-insured, your money is protected. No matter what happens, your bank will pay your CD back, along with the agreed-upon interest, at the designated time. This makes a CD one of the safest investments out there.
CDs are also great investments for children. If you want your child to save up financial gifts from grandparents, for example, depositing the funds into a CD with a specific term date means that your child reaps the benefits a few years down the road while eliminating the temptation to spend the money right away.
If you’re looking for smart financial moves to make in 2014, consider investing part of your savings into a CD. Unlike other investments, you know exactly what you’re getting, and can plan ahead. Making smart financial choices, especially when a family is involved, is all about planning. CDs were designed for savers, and they are a great choice for your family.