Certificate of Deposit

Few think about a savings account as a loan to the bank, but it is. You give the bank access to your funds in return for a growing interest rate. The more you save, the longer you leave the money in the bank, the more money your money makes. The bank can afford to do this because it invests your savings and uses them to make more money. This is why problems occur when many people withdraw their funds. The bank doesn’t have enough liquid funds to produce the exact quantities the customers will ask for.

If you have some extra funds, you may want to put them to use in the form of a certificate of deposit. This kind of deposit is similar to a savings account in that you loan the bank money in return for interest, but it differs in that the interest rates are usually higher and the bank pays you back your deposit with interest within a set period of time. You will get higher interest rates depending on how much you deposit and how long you leave it deposited.

Look at it like this: if some funds are just sitting around in your account, you are losing money that you could be making from stagnant cash. Both you and the bank will benefit from your deposit. The bank has more funds to invest to make it more money and bring in new clients while you end up gaining monthly interest off money you wouldn’t have used anyway. It’s the basic idea behind investing.

Rather or not you should make use of a certificate of deposit depends on how much money you have lying around. If you don’t have much liquid (usable) cash, then you’ll want to keep plenty on hand for emergencies and normal expenses. Cash used for a certificate of deposit is frozen until the agreed term is up. A savings account may be a better idea if you will need to withdraw some of the cash you’ve put away.

If you have a business, you may want to make your deposit under your personal name. Personal CD’s receive higher interest rates then Business CD’s and you can still use the cash you generate for your business. Smaller institutions also generally give higher interest rates because they need more new customers then big institutions. Be careful with smaller banks, though, as they are also less reliable. Your assets may stay frozen longer then you planned.

Certificates of deposit can be a great choice for the investor with extra funds. The investor should take into consideration where he or she wants to deposit, how much she or he can realistically freeze, and if the interest would give enough profit to justify freezing the assets.