With the economy sailing on the rocky boat its on, it can be hard to know what to do with your money at this time. Everyone has their predictions on whether things are slowly on the mend or if we are headed to recession land. We have seen country wide the highs and lows of the housing market and currently it seems to be mellowing out a bit, but the interest rates are having a bit of a growth spurt. Thanks to those new sky high interest rates, many banks and financial institutions are offering CDs at a much higher interest rate. If you don’t know what a CD is, you might not be too excited about the new offers. Let’s get to the bottom of what a CD is exactly, how it works, and how it can benefit you in these uncertain financial times.
What is CD?
A CD is a certificate of deposit. It essentially is a savings account that holds a lump sum of money for a fixed amount of time; and in return, gives you a higher fixed interest rate. So you earn more interest on the money in the account than you otherwise would in a normal savings account due to the interest rate being higher.
The national average for the typical savings account is about 0.23% APY (annual percentage yield). So less than half a percent is earned in your basic savings account. By moving your money into a CD, you are able to earn more interest without doing anything on your part besides setting up the account.
How long is your money locked up?
The only thing that can really be considered a downside to a certificate deposit, is that you must leave the money in for the fixed amount of time to avoid penalties. The amount of time needed to reach maturity will vary. You can get a CD with a lifespan of as short as 3 months to as long as 5 years.
Banks know that sometimes life happens and you need your money now. If you need to access your money due to an unforeseen emergency or expense, you certainly can withdraw some or all of it if necessary. However, you will be penalized for it. You wont lose any of the money that you initially put into the account, just some or all of the interest you’ve earned, depending on the bank’s policy. Its best to let the money mature if you can help it.
Why are banks offering a higher rate for CDs’ currently?
You can get a CD at anytime you want, so why is now a good time? Since interest rates for homes and automobiles are extremely high right now, that means that the banks are lending out more money to people so they are able to make those purchases. The banks get money from those high interest rates so they need money themselves to take on the debt of those purchases. By offering to pay you a higher interest rate on your CD for a fixed amount of time, lets the bank use your money to buy up other peoples debt. The banks then make say, 6% interest off of someone’s new home loan and then gives you say, 3% for helping them make that profit. It’s a win, win for everyone and you don’t risk losing a penny.