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Looking For A Safe Investment? Try A Certificate Of Deposit
By: James Dimmitt
If you are looking for a safe investment and you have between $100 -$1,000 to
invest, you should consider a certificate of deposit or CD. When purchased
through a bank, CD’s are federally insured up to $100,000.
When you invest in a certificate of deposit, you are lending your money to the
bank for a set period of time at a fixed rate of interest. At the end of that
time period, the bank pays you back your investment with the interest you’ve
earned. The annual interest earned is reflected by the annual percentage yield
or APY.
There are several details to consider before investing in a CD. First, find out
when the CD will mature? Banks offer certificates of deposit with maturities
ranging from 3-months to 10-years or more. Figure out how much to safely invest
and how long you feel you can leave that money alone so that it earns interest.
Also, make sure you get the maturity date in writing.
Second, you’ll want to know the annual percentage rate (APR) you’ll earn on your
investment. Investing larger sums for longer terms usually earns the best
interest. However, even a small investment can earn you higher interest than a
traditional passbook savings account.
Next, find out how the interest is compounded - daily, monthly, or annually?
Daily compounding is best because it earns you more interest. You can shop for
the best CD rates at http://www.bankrate.com or check with your personal banker.
Shopping on the internet, I found rates for a $1,000 1-year CD in my local area
ranging from 2.96 to 3.97 APR and a 3.00 to 4.05 APY respectively. So if I
invested $1,000 at 2.96 APR, at the end of 12 months I’d get paid $1,030.00 by
the bank (figures computed with interest compounded monthly). That same $1,000
invested at a rate of 3.97 APR would return $1040.43.
Interest rates are usually locked in for the term of the CD, although some banks
allow you to take advantage of higher interest rates by converting your CD. This
type of CD is called a “step up” CD. Generally, banks will only let you “step
up” once during the term of the CD.
What happens if you withdraw your money before the certificate of deposit
matures? Your bank will impose an early withdrawal penalty, which can vary
depending upon the maturity date and the amount invested. It’s important to
invest only money you can truly afford to leave alone for the term of the CD.
As with any investment, make sure you understand all the terms, fees, and any
penalties before you purchase.
Copyright 2005, http://www.yourfreecreditreportnow.com
About the Author:
James is editor of "TO YOUR CREDIT", a free weekly newsletter with tips to help
you manage your personal finances. Subscribe today and receive his e-book
“IDENTITY THEFT- How To Avoid Becoming the Next Victim!” and other money-saving
bonuses by visiting http://www.yourfreecreditreportnow.com
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