Essential considerations when opening a CD account

If you are seeking ways to make your money stretch a little further, you may have already thought about investing in stocks and shares. However, it is not for everyone. A more common approach to making your finances work a little harder for you is through a certificate of deposit (CD) account. Formally agreeing to leave a lump sum of money untouched for a set period allows you to benefit from better interest rates. There are obviously essential things to consider when it comes to opening a CD account, so continue reading to find out more.

Which financial institution?

It always pays, if you pardon the pun, to do your research when it comes to financial institutions prior to opening an account with them. It is advisable to find a bank or credit union which offers promotional CD rates. According to APY GUY, First Republic Bank currently has a couple of promotions available. We would also suggest that you speak to friends and family members to see which institution they would recommend based on their own experiences. Online reviews are also useful to consult. 

Which type of CD?

There are numerous types of CD accounts and, as with researching the financial institution you choose, you ought to also find out as much as possible about the specific CD account you go with. As mentioned previously, you receive a more substantial interest rate due to agreeing to leave a sum of money in your account untouched for a set period. Of course, if you wish to withdraw the money sooner, this will mean you are likely to pay an early withdrawal penalty. You can also choose an account which has a fixed interest rate. As interest rates within the country rise and fall, sticking to a fixed term one means there will be fewer concerns about financial uncertainty. 

There are no penalty accounts available. For these, there are fixed interest rates, and if you wish to withdraw money, you can only take out the full amount. It is all or nothing. This is usually a great option for a rainy day fund, allowing quick and easy access should you need money quickly. There are also accounts known as ‘liquid accounts’. These are also no penalty fees. However, the initial set-up amount is larger than the standard expectation. These are just a few different types of accounts available to you. We always advise seeking independent financial advice prior to setting one up. Everyone’s circumstances differ and, therefore, the right account may not be the same as the one your next-door neighbour’s cousin’s uncle found to be suitable for him.

How long a term?

The term of your CD account will also depend on several factors. Typically, the longer the period of time your money is in the account, the more interest you will accrue. However, if interest rates are variable and plummet for whatever reason, you risk not making as much as you had hoped. No one can ever accurately predict the future. However, it is important to look ahead and think about major events which are likely to happen in your life, such as moving house, having a baby, retirement or supporting a child through college. Based on this, you can make an educated decision as to the term of your account. 

 

How will you get the interest?

Interest pay outs can be paid to you either monthly or annually. It is usually your decision as to how often. If you are not relying on the payments to be financially stable, an annual lump sum can be appealing, especially for events such as the holidays, special occasion, such as an important birthday, or a vacation. Some accounts also offer you the option of reinvesting the interest, thus accumulating more at the end of the account’s term. 

How will you fund the CD account?

Ensuring that you have a large enough lump sum to deposit in a CD account is imperative. If you are scrambling around trying to find the right amount of money, it is perhaps worth considering whether you will be able to remain financially stable while a fair amount of money is sitting in an account. Weighing up whether you need the finances now or in the future is essential. In some circumstances, it may be possible to offer a larger amount than you would usually be able to afford. For some people, coming into money through a compensation pay out or a significant inheritance sum, for example, will mean that it is easy to find the required amount.