Finding Quick Cash with CD Investments
Millions of consumers who wanted to save up quick cash for emergencies looked to CDs, or Certificates of Deposit, to make the process easier. By nature a CD is a great savings vehicle with the only negative being that its interest rates normally are less than favorable.
The Certificate of Deposit
There are many other saving tools around with much higher interest rates and fewer time restrictions. Still, CDs manage to be a viable option for saving because of their nature. Anyone can invest with them because the only real restrictions are time and the amount. CDs normally take a specific amount of cash that’s placed into the account and accrues interest over the length of the investment. Three, six and nine-month long CDs are the most common but there are also longer-lasting CDs that offer higher interest rates of return. Though those rates are “higher,” they are still only an average 2.91% on a 5-year CD, with shorter-term investments capping out at around 0.9%.
Low interest CDs
The market rate CDs, or short-term ones, are the ones currently being scrutinized. According to a recent Bankrate.com survey, people who are ridding themselves of their low-interest rate CDs are paying a lot more than they originally bargained for. In fact, most financial institutions today hike up the cost of early withdrawal penalties. Of the financial institutions surveyed, 92% of them not only charge an early-termination fee, but also take costs out of the principle to cover any additional fees they need to cover.
How the fees add up
The Bankrate.com survey showed some interesting facts on financial institutions and CDs that are withdrawn early. Research shows that the withdrawal penalty for a CD is normally equal to about six months’ worth of interest. That number isn’t consistent though, and investors are warned to be aware of how their money is going to be allocated if they withdraw it prematurely. For example, Presidential FSB bank in Washington, D.C. has a return of 2.5%. If a consumer withdraws it early he or she can expect to pay 24-month’s worth of interest in penalty charges. If their CD is valued at over $10,000, then the penalty for early withdrawal is $506.25. For consumers who are trying to make the most of their quick cash by investing it, the early withdrawal costs of a CD may thwart their plan.
Think about investments long-term
Some CD investors of the past signed up their money for longer periods of time to take advantage of the higher interest rate return. This used to be a good idea, but now that financial institutions are shoring up their rules and regulations for the sake of bigger returns, it isn’t as useful an option as it once was. In particular investors who know they will need money sooner may find the technique of signing up for a higher-interest CD counterproductive.
According to financial experts, however, there is a solution. Investors should stop looking at the bigger return of long-term CDs and opt for CDs with a more realistic length. Accounts with more favorable maturity dates come with lower interest, but investors can then reinvest them once they come due. The added benefit is that the market is on the upswing, so that means insurance rates will be going up, too.
Investing money post-recession
Banks are harder on investors these days. After weathering the recession, financial institutions are making their rules more difficult to cut back on losses. Despite changes, though, there are still ways to manage. Consumers need to assess their individual needs and then choose the right savings vehicle accordingly. CDs are still viable savings tools, but need to be maneuvered wisely to maximize fast cash for the future.