With interest rates still hovering around historic lows, savers that park their money in a traditional savings account are earning dismal returns. Savers that choose to place their money into a certificate of deposit account earn higher returns with very little risk to their funds. With fewer safe places available for savers to store their money while still earning interest, putting your money into a certificate of deposit may be the best option to ensure that you do not lose your principal. In order to get the most out of a certificate of deposit account, you should follow some of these tips.
Investigate Early Withdrawal Penalties
Before choosing a certificate of deposit, you should investigate what the early withdrawal penalty will be if you must withdraw your money before the end of the term. No one can predict what will happen in the future and there may be a remote chance that you will need to withdraw your money unexpectedly. Because financial institutions are allowed to set their own penalty fees for certificate of deposit accounts, the fee for a $10,000 withdrawal can be as little as several months’ worth of interest (about $3) or as much as 4 percent of the amount withdrawn ($400). It is better to know what the fee will be before you have to make a quick decision on whether to withdraw the money.
Choose Shorter Terms
Fixed income investors can run into problems when interest rates rise after being low for a significant period of time. If a significant portion of their money is locked into a low interest certificate of deposit, they may be stuck with an underperforming investment for the rest of the term or may be tempted to withdraw money from the account early, subjecting themselves to penalties that could wipe out any interest earned along with a portion of their principal. By choosing certificate of deposit accounts that have short maturity terms, you will have the ability to roll over the account or invest your money into higher earning options, depending on the options available to you at the time.
Split Your Savings
Instead of depositing a large sum of money into a single certificate of deposit account, consider splitting up your savings into multiple accounts of varying maturities. This will allow you to take advantage of higher yields on longer maturities while still maintaining liquidity if funds are needed unexpectedly. For example, someone with a $10,000 deposit would make a $2,000 deposit each for a one-year, two-year, three-year, four-year and a five-year maturity term. As the one-year term ends, the amount is reinvested into a certificate of deposit with a five-year term.