If you are looking for a safe investment and you have between $100 -$1,000 to invest, you should consider a certificate of deposit or CD. When purchased through a bank, CDs are federally insured up to $100,000.
When you invest in a certificate of deposit, you are lending your money to the bank for a set period of time at a fixed rate of interest. At the end of that time period, the bank pays you back your investment with the interest youve earned. The annual interest earned is reflected by the annual percentage yield or APY.
There are several details to consider before investing in a CD. First, find out when the CD will mature? Banks offer certificates of deposit with maturities ranging from 3-months to 10-years or more. Figure out how much to safely invest and how long you feel you can leave that money alone so that it earns interest. Also, make sure you get the maturity date in writing.
Second, youll want to know the annual percentage rate (APR) youll earn on your investment. Investing larger sums for longer terms usually earns the best interest. However, even a small investment can earn you higher interest than a traditional passbook savings account.
Next, find out how the interest is compounded – daily, monthly, or annually? Daily compounding is best because it earns you more interest. You can shop for the best CD rates at www.bankrate.com or check with your personal banker.
Shopping on the internet, I found rates for a $1,000 1-year CD in my local area ranging from 2.96 to 3.97 APR and a 3.00 to 4.05 APY respectively. So if I invested $1,000 at 2.96 APR, at the end of 12 months Id get paid $1,030.00 by the bank (figures computed with interest compounded monthly). That same $1,000 invested at a rate of 3.97 APR would return $1040.43.
Interest rates are usually locked in for the term of the CD, although some banks allow you to take advantage of higher interest rates by converting your CD. This type of CD is called a step up CD. Generally, banks will only let you step up once during the term of the CD.
What happens if you withdraw your money before the certificate of deposit matures? Your bank will impose an early withdrawal penalty, which can vary depending upon the maturity date and the amount invested. Its important to invest only money you can truly afford to leave alone for the term of the CD.
As with any investment, make sure you understand all the terms, fees, and any penalties before you purchase.
Author: James H. Dimmitt