Are you in need of a risk-free platform to park your savings? You could pitch in and open up a regular-old savings account. But with this old-school investment plan, your overall interest shall only be microscopic. Pitching your money in a high-yield or high-interest savings account can be potentially smarter. However, the best option just might be opting for a Certificate of Deposit or the CD.
While the highest rate for high-yielding SAs is currently tipped at 2 percent mark, you can easily find that CDs pay higher interest rate dubbed at 3 percent mark or more. However, in order to earn an interest of that kind, you need to understand the fact that you might have to give back something to the bank in return.
So, here is the deal with the CDs. You would have to agree for letting the banks freeze your money for a defined term which could be months or maybe years. This is termed as CD’s term. You can pick from a time-frame of 6 months, 2 years, or 5 years when opting to stash money with the CDs. With CDs, the longer this term duration, the higher is the overall interest rate on your saved money.
The payout acquired from CDs lasting long term can be particularly enticing, especially for the ones that are in dire need of better returns. But this means you would have to lock away the money for a good long time. Say, for example, any financial emergency jumps along, you would get your money but tapping on the CD before its term could be a costly affair.
However, CDs can come with their own set of risks although small but they are present. You can place as high as $250,000 in the CDs with no chance to lose the money, but only as long as the account has been placed under a bank that is insured by the FDIC or any Credit Union that is insured by the NCUA. The risk comes from the fact that any early withdrawal of the money comes with the risk of being penalized. The rules tend to vary but you surely have to lay off a good fraction of your overall interest.
If you close the CD a year earlier than the set time-frame, you can bid adieu to your interest worth 6 months. Not just that, if you have had your CD in for just 2 months and plan on withdrawing the same, the penalty could actually be subtracted from your principal amount.