Q: I am 21 years old and have $2,500 saved up. I am thinking of getting my first CD, but I am somewhat confused as to the options. Can you help me know how to choose a CD?
A: There are several factors that go into choosing a CD, but the best place to start is deciding on a time frame.
Certificates of deposit require that you lock up your money for a specified time frame. If you need to withdraw your money early, you will probably have to pay a penalty. If you are not sure you can afford to lock up your money, then savings accounts or money market accounts may be better suited to your needs.
If you can afford to lock up your money for a while, then decide specifically how long you can go without accessing this money. This will indicate how long the term of your CD can be. Typically for CD customers, this can be anywhere from a few months to five years. Note that the longer you can commit your money, the higher the CD rate you are likely to get. The downside to a longer CD is that you won't benefit immediately if market interest rates rise.
Once you've decided on the length of the CD you want, shop for the best CD rates at that length. Don't make the mistake of assuming that CD rates are pretty much the same from one bank to the next -- the best CD rates can be significantly higher than the national average, so shop carefully before you commit.
Length of term and interest rates are probably the most significant factors in choosing a CD, but there can be plenty of more subtle twists to these products as well. You should look around MoneyRates.com for more information on CDs, from a basic introduction to more advanced strategies.
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