Getting More From Your Money: Part 4

Today we want to share a little bit of knowledge about Certificates of Deposit or what we commonly refer to as CDs. I think they get a lot of bad press because they are what are called ‘term’ deposits. What ‘term’ means is that you are handing over your money for an agreed upon period of time. Many people shy away from this kind of investment because of the fear that “I might need that money before the term is up and then what?! I’ll lose money”. Liquidity (or easy access) tends to be one of the most important factors to people when it comes to their money. Liquidity is second only to security in importance to most people.


Now let’s debunk a lot of the fear behind investing in Certificates of Deposit, so you can start using them to earn more money.

1. I have to hand over a lot of my money if I want to open a CD. This is quite simply untrue (well, from a perspective). Most financial institutions will allow you to open a CD for $1000 and some will allow them for even less. Some institutions will only require you open a CD of $500. Of course, the more you put into a CD the higher your rate will be, but even these smaller amounts will generally earn you 2 to 3 times the interest of a savings account, and definitely 4 to 5 times the interest of most checking accounts (usually a checking account offers no interest unless many qualifications are met).
2. I have to give up my money for a really long time. Again, this is true and false. The longer you put your money into a CD the higher your rate of return will be, but often you can open a CD for less than a year and often for as short a term as 6 months. So do you see how this is becoming a little more feasible? So for only $500-$1000 and for only 6 months you could be doubling, tripling, quadrupling or more the interest that your money is earning back for you. And most of us have close to 6 months of foresight.
3. If I have an emergency and need the money I’m going to get penalized. This will depend upon your institution. There will always be a penalty, but it most often will not be as bad as you fear. In most cases you will never lose any of the money you invested. Most institutions charge a penalty against the interest earned. As an example on a 24 month CD, if closed early, you may lose 6 months of interest. On a shorter CD you may lose 3 months. In any case, you have kept everything invested, and if you had a CD for 12 months, closed it at 11, lost 3 months of interest, then you are still ahead of where you would have been with your regular savings account. You earned 8 months of interest that was 2 to 3 times your savings account, or 1.5 to 2 years worth of what your savings account would have earned! See how easy it is?
4. It will be a big hassle for us to close it early. It only take a couple seconds for the CD to be closed out whether at maturity or earlier. The process is really the same, needing only the check of a box on the computer to go forward with or without a penalty.
5. I don’t have time to open a CD. Everyone has the time. Many places will allow you to do it over the phone because your money stays within your account (if you are opening a CD at your current institution). If you are going to a new bank or Credit Union, then yes, plan on a little while to set yourself up, but opening a CD with your current financial institution is a couple minute process.
--This isn’t a concern of anyone’s, but check with your financial institution. Ask them what your average balance has been for the past few months. I guarantee it will be higher than you think and hopefully it may provide courage enough to those who need it to finally get a little bit more out of your money. This question can usually be answered as simply as calling on the phone.
So that’s the advice for the day. Nothing too fancy, just a little bit of knowledge we’ve picked up. If you have any comments or questions feel free to let us know, and please--you owe it to yourself--start getting more from your money.