All of us would like to see our money grow, and there are a variety of ways to do that. But not all of us like the risks that come with certain investments. That’s where a certificate of deposit (CD) comes in.
A CD makes sense for people of all ages who are looking for a low-risk investment of funds that they don’t need to use immediately. We will take a closer look at CDs including what they are, how they work, and their advantages.
How they work
There are several ways in which CDs are different from traditional savings accounts, but one important difference is that, with a CD, you agree to keep your money in the account for a set period of time. Terms can vary, but the standard range is between three months and five years. At Peoples Bank, terms range from one to four years.
Typically, the longer the term length, the higher the interest rate you’ll earn.
Is a CD right for you?
Before investing in a certificate of deposit you’ll want to consider a couple of factors:
- First, what is your time horizon? If you have funds you don’t need to use for six months or longer, a CD may be ideal.
- In which direction are interest rates expected to go? If rates are rising, then a short-term CD might be your best option. If rates are falling – or when the economy is on a downswing – a longer-term CD may earn you more money because you can lock into a higher rate.
Before you invest, there are two numbers you should know:
- The interest rate the bank will offer you on a certificate of deposit.
- The annual percentage yield (APY). This tells you what you’ll earn over the life of your CD considering the effect of compounding.
CDs are investments in which you commit your funds over a specific term. If you withdraw your money early, you’ll probably be charged a penalty. It varies with each financial institution, but a typical penalty is one in which you give up three to six months worth of interest you’ve accrued.
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At most banks, CDs are backed by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. Coverage is automatic, and you don’t have to apply for this insurance. Banks with federal backing must display FDIC signs at teller windows and on their websites. Peoples Bank is a Member FDIC bank.
The practice of “laddering” involves investing proportionately in a variety of term lengths. As each shorter-term CD matures, you reinvest the earnings in the CD with the longest term.
A certificate of deposit from Peoples Bank may be a great way for you to invest and take advantage of current rates. When you invest with People Bank, you are working with “People That You Know” in your community.