Calculating CD Rates: Five Steps to Determine What You Need

Both serious investors and beginning savers can benefit greatly from the terms of certificates of deposit (CDs). A CD is a low-risk investment solution that allows you to earn interest on your money without concern for the current economic climate. Because you’ll agree on a particular term of investment with your bank, you’ll earn higher interest rates than you would with other types of savings vehicles. Though your money will be locked in, you’ll accrue more interest and have a higher balance when the CD has finally matured. As you compare banks to find the best interest rates, consider the following steps to calculate what you really need.

1. Outline Your Savings Goals
Calculating CD Rates: Five Steps to Determine What You Need
Before looking around for a CD, outline your savings goals and create a plan for your investment. The amount of money you’ll need to meet your financial goals can determine the type of CD you’ll choose. Most CDs have strict policies regarding withdrawals and maturation, but some have greater flexibility in case you run into an emergency and need the funds. With a clear picture of your financial goals in mind, you can look for a CD that meets your needs.

2. Figure Out When You’ll Need the Money

CDs with longer terms typically have higher interest rates, so it’s important to figure out when you’ll need the money. For example, if you’re focused on maximizing the value of your retirement fund, you might choose a CD with a higher interest rate and a longer investment term. If you simply want a way to make some extra money on your high school student’s college savings, you could consider CDs with shorter investment terms. Early withdrawals generally carry steep penalties, so be sure to find an investment term you can comply with.

3. Consider the Value of Your Investments

With favorable CD rates and a long maturation term, you can accrue a sizable amount of interest over the duration of your investment. However, you should still consider whether or not your CD earnings will meet your financial goals. Estimate the future value of your CD and determine whether or not you’ll need additional income from other investments. Many experts suggest diversifying your savings by keeping some money in risk-free accounts with low interest and other funds in investments with higher interest. Regardless of the investment strategy you choose, be sure that you’re comfortable with the future outlook for your savings.

4. Shop for an Account with Favorable Terms
Calculating CD Rates: Five Steps to Determine What You Need
Once you know what kind of CD rates you’ll need, you can begin comparing banks and looking for the best terms. In addition to shopping for the highest interest rate, you’ll need to consider the duration of your investment term and whether or not it will work for your savings goals. You should also think about any applicable penalties or special rates before opening the account.

5. Review the Agreement and Prepare to Invest

As you get ready to open your CD, be sure to review the agreement carefully and make sure you understand the terms. In addition to penalties for early withdrawals, some CDs automatically transfer your money to a new CD at the end of your investment term. When you’re informed about your investment, it’s easy to meet the terms and enjoy a secure, profitable way to save.

Author: Nicole F. is a freelance writer with a wide range of publications to her credit. She specializes in articles on finance, search engine optimization and Internet marketing. Nicole has a background in management, journalism and English literature and has been writing full-time since 2010.

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