There are a number of different investment routes you can take that will allow you to save up for retirement. Since 401(k)’s and IRA’s are used for retirement, you usually cannot touch they money until you are at least 59 ½ years old. What happens if you have a financial problem and you need to access this money? You will be charged a hefty penalty for making a withdrawal so most people decide to use credit cards and loans to pay for unexpected expenses instead. This is where a certificate of deposit (CD) account will come into play.
While you may not make a ton of money from a CD account, you will be able to save up money and earn a bit of interest with the option to pull out the money in a short period of time compared to a retirement account. Typically a CD account comes in 6 month notes, 3 year notes, 5 year notes, and 10 year notes.
What is a CD?
A CD is offered by a bank, credit union, or financial lender and it is insured by the FDIC so you will get your money even if the bank goes under. When you use a CD account, you will choose the maturity date and look for a high interest rate so you can make a nice profit by adding your money to the account. Similar to a retirement account, once you put your money into the account you cannot touch it until it reaches its maturity date or you will need to face some harsh penalties. If you aren’t sure if and when you might need your money, it may be a better idea to stick with a shorter maturity date so you can get your money quicker.
Choosing the right interest rate
As we previously stated, you will make your money through the interest rate on your CD account. Don’t expect to make a fortune with a CD account as the interest rates are usually just above that of a savings or money market account. The frustrating thing about getting a CD account at the wrong time is that you will need to pay a penalty if the interest rates go up when you try to access your money. For this reason, many people look upon CD accounts as a risky investment and it is not always the best way to make a small amount of money.
However compared to bonds, a CD is less risky as it is backed by the FDIC so you will get your money back no matter what. If you invest in the wrong bonds and the company declares bankruptcy, you will never see your money again. This is why a lot of people choose to invest in municipal or government bonds as they are backed by the government and there is a large chance that it will never fail.
Where do I find a good CD?
As you begin the search for a good CD, talk to a few local banks and credit unions. They often run specials on CD accounts and you can get a great interest rate even on the shorter CD accounts. However a lot of people have found online banking companies offer the best CD interest rates and you don’t even need to leave your home to open up an account and invest some money. It’s a simple way to make some money quickly instead of leaving that money in a savings account for 2 years where it barley accumulates any interest.
Just be careful about an early withdrawal from the CD account as you will end up paying about 10-15% of your accumulated interest to date. The other downside is that you will not be able to accumulate any future interest on the account once you start withdrawing money from the account.