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Increased Interest—Certificates of Deposit, the Other CD  
One way you can earn more interest on your money than with a traditional savings account.


FinancialIf you're among the fortunate people who have been able to develop a regular savings habit, pat yourself on the back! Financial planners and experts agree that you should decide what your budget will allow each month and "pay yourself first" in the form of a deposit to your savings account. But lately, interest rates on savings accounts have been anything but stellar. Savers have the security of having their money safeguarded and insured by the bank, but see a slow and steady accrual of interest. For those who truly "bank" their savings and seldom withdraw from their savings account to cover bills, purchases, or other emergencies, a Certificate of Deposit or CD may just be the option for earning greater interest.

According to the U.S. Securities and Exchange Commission (SEC), a certificate of deposit (CD) is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other types of investments, CDs are federally insured (through the FDIC) up to $100,000. When you purchase a CD through a financial institution, you are investing a fixed amount of money for a fixed period of time. The lengths of time vary and commonly include six months, one year, five years, and more. In exchange for your investment, the bank issuing the CD pays you interest during the agreed upon time period. At the end of the investment period, the CD is cashed in or redeemed and you receive the money you originally invested plus any interest that has accrued. If you choose to redeem the CD before it matures, you will have to pay a penalty for early withdrawal or forego a portion of the interest you earned.

FinancialCDs were initially only available through local banks. The SEC notes, however, that CDs can now be purchased through brokerage firms and independent salespeople known as "deposit brokers" who can sometimes negotiate higher interest rates for a CD by promising to generate a certain amount of deposits for the institution. CDs also used to offer only a fixed interest rate, but that too has changed over the years. Today, investors may choose from variable-rate CDs, long-term CDs, and CDs featuring other special options. "Call" features affect some high-yield, long-term CDs and mean that the issuing bank can choose to terminate (call) the CD after only one year or another fixed period of time. A bank may choose to call high-yield CDs if interest rates fall.

As with any investment of your family funds, be sure to educate yourself fully on the many variables associated with CDs. The Federal Deposit Insurance Corporation (FDIC) recommends the following tips before you venture into a CD investment:

  • Make certain you fully understand all terms.
  • Carefully read disclosure statements, including fine print.
  • Don't be lured in by high interest rates.
  • Ask questions and demand answers.
  • Confirm the maturity date of the CD before purchasing.
  • Identify the issuer if investing in brokered CDs. Since federal deposit insurance is limited to an aggregate total of $100,000 for each depositor in each bank or thrift institution, it is important to know where the broker plans to deposit the money.
  • Be aware of and understand any "call" features.
  • Confirm the interest rate you will receive, how often the bank pays interest (monthly or semi-annually) and how you'll be paid (by check or electronic transfer of funds).
  • With variable-rate CDs, understand how and when the interest rate can change. Some decrease over time according to a set schedule, others are tied to the performance of a market index such as the Dow Jones Industrial Average.
  • Be aware of any penalties for early withdrawal.
  • Inquire about additional features including death benefits that allow the CD owner's heirs to redeem the CD, without penalty, after the owner's death.
  • Should any questions or problems with a CD arise, contact an officer of the bank issuing the CD first before involving an outside party.

Your family savings is a vital aspect of your overall financial security. Certificates of deposit are a relatively safe way to put your money to work generating interest while you continue to save. Educate yourself about the variety of CD options, ask questions when in doubt, and make choices that are appropriate for your family's future and specific financial needs.

As with any financial decision, consult with your financial advisor or tax consultant before making any investment.

U.S. Securities and Exchange Commission—
Federal Deposit Insurance Corporation—

Articles are provided for the general interest of our readers. Gerber Life Insurance is not responsible for any content and recommends that you consult the appropriate professional with any questions or concerns you may have concerning any financial or health related issues.

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