Certificate of Deposit

Question: How does a Certificate Of Deposit (cd) work?

I am exploring the idea of opening a cd. I have seen that many banks ask for a minimum deposit of $1,000 to do so.

How does it then work? If I open a 12 month cd with the minimum of $1,000, and the interest rate is %4.25, what am I looking at financially overall?

What are the benefits of doing this, and are there any downfalls?

Answer: You deposit a certain amount of money with the bank and earn the offered interest rate, in your case, 4.25%. At the end of 12 months, you would earn approximately $42.50 = benefit. (The money earned is added monthly though, not annually.)

The downside is that you can’t use any of that money during the entire 12 month agreement. If you need to access it, you do so with a penalty.

Another downside is that the percentage rate of interest may change in the economy during the course of your investment. Let’s say you put your money in a 5-year CD at 4.25% interest, which is currently about average. Then we get a great economy boost, and the average interest rate becomes 8%! But you’re locked into the agreement, so you’d still be stuck at that 4.25% rate.

Some CDs are for a shorter length of time. I’ve done CDs with 4-month, 6-month, and 9-month terms. So generally speaking, CDs are nice and safe, but look around for ones that offer higher percentage rates and shorter terms.

Personal Finances & Money Management : How to Create a Beneficiary for a Certificate Of Deposit