I'm assuming you have accumulated a stash of cash. Now you want to invest it in CDs. Certificate of deposit accounts (CDs) are perfect if you want a high interest rate but are unwilling to sacrifice liquidity. This basically means that for a high interest rate, you lock up your money for a certain time period. This time period is called the maturity.
A great benefit of CDs is that they pay you interest. You have the option of reinvesting the interest or spending it. I recommend reinvesting your interest if your goal is to make your money grow. When you earn interest on your interest , it's called compounding, and it allows your money to grow faster.
You may be confused because there are a lot of Certificate of Deposits (CDs) out there. You wonder which one or ones you should purchase. With so many choices out there, you begin to feel dizzy. Fortunately, there is a methodical way to compare CD rates.
- This first step is a no-brainer, but many people forget. Find CDs that pay a higher Annual Percentage Yield (APY) than a savings account does. (The APY is the amount you would get for keeping your money in an account for a one-year time period.) Remember, you are locking up your money for a set period of time. Make sure that you are compensated for that risk.
- Do some research. Begin by checking your local newspaper, mail, and banners at financial institutions. Check out Bankrate online to see what competitive financial institutions are paying in terms of APY, and maturity.
- Call your credit union to get their CD rates. Ask your credit union how its rates compare to bank CD rates. You may just find a fabulous deal!
- Don't forget to see what interest rates are doing. If you see them going up, consider a shorter-term CD since bank CD rates may be higher in the future. It isn't easy to predict the direction that interest rates will go. That's why people on Wall Street are paid big bucks for making the attempt.
- Costco is not the only place it pays to buy in bulk. To get the best rate you may have to meet certain minimums. If your assets are spread out at different financial institutions, you could be missing out on a "preferred customer" rate. There may be an advantage to consolidating your assets at one financial institution.
- Keep an eye on current interest rates. Bank CD rates are set competitively to the market. The bank knows that you have a choice of where to invest your money. As a consequence, banks try to be competitive when setting rates. You will notice that when interest rates rise, bank CD rates rise as well.
If you follow the steps above, you should be able to compare CD rates, and get the best rate to your own advantage. Don't forget that when your CD matures, you have a window (which is usually 10-15 days) to decide what to do. Unless you give your bank instructions otherwise, it will automatically reinvest your money into a new CD. Watch your money to make sure it continues to grow. I think it was Albert Einstein who said that compound interest was the 8th wonder of the world.