You’re likely familiar with savings and checking accounts, and probably a 401k or 403b that’s available through your employer, but what do you know about a Certificate of Deposit (CD)? Chuck Gearhart, First Internet Bank’s Vice President of Retail Banking explains how a CD works, and how it may fit into your strategy for a diversified portfolio.
What is a CD?
A CD is a savings certificate with a specified, fixed interest rate and a fixed maturity date. CDs can be issued in any denomination aside from a financial institution’s minimum investment requirements. CDs restrict access to your funds until the maturity date of the investment.
How can a CD fit into my savings and investment plans?
There are a number of factors to consider before investing in a CD: your overall investment strategy, your portfolio mix, your time frame and your risk tolerance. For example, if you are looking to “park” money in an investment, and let it grow over time, a CD may be a good option.
What are the advantages of a CD?
One of the biggest benefits of using a CD is that it is one of the safest investment options available. CDs are also insured by the FDIC up to $250,000. Another benefit you may not be aware of is that you can withdraw the interest from your CD penalty-free.
When is a good time to invest in a CD?
A CD is a good option when you are less worried about growth of funds and more focused on preservation of funds. If you’re an individual who does not like risk, you’ve already retired and you want to know exactly what your investments will make, you might be a good candidate for a CD.
How should you decide the length of time for your CD?
CDs lock up your money for a specific term, so you need to be comfortable with not having access to those funds for that time frame (unless you’re willing to be subject to an early withdrawal penalty). For example, if you are planning to use the allotted money to buy a new car in 18 months, a three-year CD may not make sense for you. Work with your banker or financial advisor on your goals and strategy to determine the best time frame for you.
What amount of money should you invest in a CD?
The amount of money you invest will depend on your specific situation and comfort level. CDs can also provide some additional diversification by “laddering” your money. Laddering occurs when you stagger your CD maturities with a one-year CD, a two-year CD, a five-year CD and so on.
Is a CD right for you?
This is the million-dollar question, and there are just as many opinions. Traditionally, the longer the term, the higher the rate for CDs. Again, it all goes back to your comfort level and strategy. Work with someone you trust who will take the time to listen and answer your questions thoroughly so you can select options based on your personal situation.
To learn more about CD options at First Internet Bank, visit firstib.com/cds. Our Relationship Bankers are also ready to listen and answer any questions you might have about CDs or any of our other products. Call us today at 1-888-873-3424.
