Do you ever overhear co-workers drop comments like, "CDs are looking good this year," then you excitedly chime in to say something like, "Yeah -- are you excited about the new Amy Winehouse album?" When you realize that they're talking about certificates of deposit (CDs), you awkwardly back out of the conversation. If this sounds familiar, you're not alone. Most of us don't realize the wide range of investment options that fall between savings accounts and stocks.
CDs are just such an investment. Although savings accounts are a solid first step to securing your finances, they offer paltry advantages beyond that. The interest on them tends to be relatively measly. And, especially when inflation rates get high, your money might be better used in an account with higher interest rates. On the other side of the spectrum, you could invest in stocks. However, your money will encounter more risk in the stock market, and some shy away from such aggressive investments.
When you've garnered a comfortable stash of funds that you feel you can do without for a while, CDs are a great next step. They offer a higher interest rate than savings accounts, so you can watch your money grow faster. The drawback? You can look but you can't touch -- at least not without a penalty. Unlike savings accounts, a CD has a maturity date, after which you can withdraw your funds in full. If you choose to withdraw before that date, you'll have to pay an early-withdrawal fee.
Say, for instance, you're doing comfortably right now and have a healthy savings stowed away. If you want to see it grow a bit to make sure you can afford retirement or a child's college tuition (and you don't like the idea of trusting a volatile stock market), CDs are a good alternative.
Next, we'll talk specifics about how CDs work.