While I recognize that this is a text on “market investing,” I feel that it is only appropriate to mention your friendly neighborhood banker. After the fear of a total banking collapse waned after the Great Depression, it became a popular American mantra that you should have some “money in savings.” I agree that you should have an emergency fund that is available on quick notice. This should represent no more than three months take-home pay for your family. As of this writing, the Fed is raising rates, but they are doing it very slowly such that it will take years of raises every quarter to really make bank savings accounts viable is a place to keep a substantial amount of cash. What about other, better bank investments?
A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a set period, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you initially invested plus any interest. Certificates of deposit are considered one of the safest savings options. A CD bought through a federally insured bank is insured up to $250,000. The $250,000 insurance covers all accounts in your name at the same bank, not each CD or account you have at the bank.
As with all investments, there are benefits and risks associated with CDs. The disclosure statement should outline the interest rate on the CD and say if the rate is fixed or variable. It also should state when the bank pays interest on the CD, for example, monthly or semi-annually, and whether the interest payment will be made by check or by an electronic transfer of funds. The maturity date should be clearly stated, as should any penalties for the “early withdrawal” of the money in the CD. The risk with CDs is the risk that inflation will grow faster than your money, and lower your real returns over time. Another risk is that if you need the money to pay bills, you must pay an “early withdrawal penalty” which will destroy your profits.
This work is licensed under an Open Educational Resource-Quality Master Source (OER-QMS) License.
Last Modified: 07/11/2018
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