Whether you have $25 or $2,500 to spare, there are smart ways to invest your money to build your retirement savings. WISER is highlighting different strategies for saving, depending on your financial situation, age and personal feelings about risk taking. Use this brief to brush up on your financial knowledge to make the most of your money.
Get Clued In on CDs:
CDâ€™s, or certificates of deposit, are available at most banks, credit unions, and savings and loan associations. They are similar to I bonds in that they are intended to be kept until their maturity date, at which time you withdraw the money you originally invested along with accumulated interest. Although they can be less convenient than traditional savings accounts because you cannot simply withdraw money whenever you wish, they generally earn higher interest rates. Because they are insured, they are also â€œrisk-free.â€ If you are nearing retirement age (for example, retiring in one to three years), CDs are a good investment choice for you as a short-termÂ investment, especially because they are very low-risk.
The terms of CDs run from three months to five or more years in length, and they usually have fixed interest rates. This means that the interest rate will remain constant throughout the entire term of the CD. The minimum amount required to purchase a CD can vary depending on the financial institution where you purchase it. If you wish to receive some money during the course of the CDâ€™s term, you can request to have the interest mailed to you intermittently, or have it moved to a checking or savings account. However, this reduces the amount of interest you earn on the CD, because you are preventing the interest from being compounded.
Things to Think About:
Closing Your CD: If you withdraw your money before the end of the CDâ€™s term, you will usually be penalized for it. Unless you have an urgent need for the money, it is best to wait until the end of the CDâ€™sterm to take out any funds.
â€œRolloverâ€: When the end of your CDâ€™s term is approaching, your financial institution will typically send you a document stating that you can withdraw your funds or have them â€œrolled overâ€ into a new CD. If you wish to withdraw the money, make sure you know if there is a time window during which you must withdraw, otherwise the bank may deposit your money into a new CD. This means you will once again have to wait for the end of the term to receive it without penalty.
Callable CDâ€™s: Callable CDâ€™s are just like regular CDâ€™s except the issuer has the right to â€œcallâ€ or redeem your CD from you before it matures. This is convenient for the issuer because, if interest rates decline, they may be able to borrow money for cheaper than what they are paying you. The issuer will likely call the CD and you will have to invest your money in another CD or investment vehicle.
Make sure you know if your CD is â€œcallable,â€ and if so, after what period of time. A CDâ€™s call date is NOT the same as its maturity date. A CDâ€™s call date couldÂ be one year, while its maturity date is 20 years downÂ the road. WISERâ€™s fact sheet on â€œcallable CDsâ€ hasÂ useful information on the subject.
The Securities and Exchange Commission also offers useful tips on things to consider before purchasing a certificate of deposit.
Stay tuned for our next installment in the Financial Literacy Series: Investigating IRAs