Investing money in a secure place is a significant decision that can be time-consuming. There are many options available in our society. A CD, or Certificate of Deposit, is a secure and straightforward way to invest money and grow your savings. It is a right and reliable choice for many people who don't want to take any risk regarding their savings. 

This article provides you with all the details about CDs. Additionally, it explains the benefits and disadvantages, helping you decide what to do when your CD matures. At the end of this post, you will be able to determine the best steps for achieving a better financial future and growth, as well as how to manage your CD investment effectively.

What is a CD (Certificate of Deposit)?

A CD is a special type of savings account offered by banks or credit agencies that pays you an interest rate for a specific period, called the "term". The term ranges from a minimum of 3 months to a maximum of 10 years. Its rates are higher than those of general traditional savings accounts. If you withdraw your amount, you will be required to pay a penalty fee, which means you will lose the flexibility of withdrawing the amount. 

The critical point to remember is the maturity date of the CD. Once the CD matures, an individual can withdraw their savings, plus the interest earned, without incurring any penalty fees. This strategy saves your savings while you earn money. A CD is actually a loan that you give to the bank or a credit agency; then, they pay the amount on it, and the interest rate is usually higher than the typical interest rate on a savings account.

What are the Benefits of CD?

A certificate of deposit is a popular savings strategy that not only pays a high interest rate but also has high security and reliability. One of the most attractive benefits is that its interest rate is fixed and high, which means it doesn't fluctuate. When you create a CD, a fixed interest rate is determined for a specific period. When your CD matures, a fixed amount is given to you. If the market rate fluctuates, the interest rate remains the same.

CDs are one of the safest investment procedures. The FDIC (Federal Deposit Insurance Corporation) secures deposits up to a specific limit ($250,000). It means that if the bank fails, your savings amount will be safe. You can choose your term duration, typically from a few months to years.

What are the Drawbacks of CD?

Despite its benefits, it also has some drawbacks that are listed below:

• One of its primary cons is that it has limited liquidity. It means that if you need money in an emergency and cannot access it without penalties, it will lock your amount, and if you pay, it decreases the amount you earn as interest.
• Your earned profit can be affected by the inflation rate. If the inflation rate exceeds your interest rate, then the purchasing power of your money decreases.

Types of CD

Many financial organizations offer different types of CDs; some of them are discussed below. Pick the one that suits your needs.

• Traditional CD: It is the typical type and most basic type of CD, in which the amount is fixed for a specific time, and the interest rate is fixed at the time of creating the CD.
• No-Penalty CD: In this type of CD, a penalty fee is not charged when the amount is withdrawn. However, its interest rate is lower than that of traditional CDs.
• Brokered CDs: These CDs are purchased from a brokerage institution rather than a bank or credit union. It means one investor sells their own CD to another investor before the maturity date.
• Zero-Coupon CD: In this type of CD, it is purchased at a discount, but it doesn’t pay any interest rate, which means that only your money is saved.
• Add-On CD: An individual can deposit additional money after opening a CD (in the current CD).

What happens when a CD Matures?

When the CD matures, the grace period comes. What is the grace period? The grace period is a specific time frame, typically ranging from seven to ten days or up to fifteen days. During this period, you need to take action on your savings amount.

If you don't take any action or are unable to make a decision, banks or credit unions will proceed with the entire CD process at the current interest rate. The current profit rate may be lower than the previous rate, so it's time to take some action. Some ways are discussed below.

When a CD Matures, What Should You Do?

Once your CD matures, the grace period begins, and you must take some action, following the essential steps to help you decide what to do during this period. 

• When your CD matures, you can withdraw your money, plus any earned interest, and reinvest it in a suitable asset, such as a business, stocks, bonds, or ETFs.
• You can have your savings automatically transferred into a new account; the procedure follows the same steps as the original CD.
• You can invest your CD amount in various types of CDs with different maturity dates.
• Some banks allow partial withdrawals or deposits, such as allowing deposits or withdrawals on the CD's maturity date.

Conclusion:

A CD is a powerful strategy and a safe investment procedure for individuals who want to invest with minimal risk. It is a secure savings account at a bank or credit union with a higher interest rate than other investment accounts. In this article, I provide detailed information about certificates of deposit, including their types and what to do when they mature. The information helps you make a valuable decision and take action within the grace period, whether you want to withdraw money, proceed with the entire CD process, or invest somewhere else.