CDs really don’t earn as much nowadays. Interest rates on deposits down so you can’t expect as much return . But in my opinion, they’re still great ways to earn a small sum on money that you might just have sitting in a regular savings account.
My rule of thumb is to place money that you don’t need in 1-2 year’s in CDs. You have the emergency fund anyway for any sudden expenses. That way, you have the security of having money for the mid-term and earn a small sum on top of it. For long term investments, it’s better to diversify and invest a percentage on higher-yielding accounts and funds.
My aunt was one who had quite a sum “invested” in CDs but she got paranoid that her bank might be the next one to close due to the recession. I told her to just keep her money in the bank since the FDIC can easily cover her deposit just in case the bank goes under. Against my advice, she dumped her CDs and paid a hefty penalty for early withdrawal.
And the penalty charges are part of the reasons why dumping your low-interest CDs might not be a good idea. MSNBC checks the top banks who charge much on dumped CDs and it might not just be your potential earning that’s gone – even part of your deposit might be taken as well thereby making your move to get a CD moot.
Here are some tips about CDs.
1. Make sure that you won’t need the money for the term you’re taking. 1-2 years should be long short enough for you not to have to spend that much money. Make sure your emergency fund’s well stocked. If you’re not too confident, opt for a more liquid deposit plan.
2. Check the terms. Before handing the bank your money, be sure that you know all the rules governing the CD – the period you’re committing your money, the rates, and the penalties for early withdrawal.
3. Crunch the numbers. So you’ve found that another bank can give you much more for your money. Before opting to dump your CD, calculate everything – the earnings you can get from a higher-yielding one versus the penalty you have to give up for dumping your CD. Chances are, dumping will always be a bad idea.
