If you've finally gotten to the point where those student loans are no longer the anchor to your financial ship they used to be, it could be time to start saving some money. To get started, you could put your money into that old standard, the bank savings account. Another option is to invest in a longer-term bank instrument, the certificate of deposit, or CD. A few key factors will determine which will be the more lucrative investment.
As a kid, you may have purged the money from the bloated belly of your piggy bank and used it to open a savings account at your local bank. With a savings account, your money earns interest at a relatively low rate, but you can make deposits or withdrawals at your leisure. CDs are financial instruments that are also sold by banks. You agree to let the bank hold your money for a specific time period, like six months or a year. In return, the bank pays you a predetermined interest rate.
CDs typically offer higher interest rates than savings accounts, but there's a catch. You cannot withdraw money from the CD before its maturity date (which is the date the specified time period ends, not when your CD develops a deeper voice and stops acting like a child) without being hit with substantial penalties. If you're the type who visits your ATM so often that your bank has erected a statue of you in front of it, a CD may not be right for you.
Generally, the longer the term of the CD, the higher the interest rate you'll receive in return. With a savings account, the interest rate may fluctuate a bit, although it is likely it will never approach that of a CD, especially if you've selected a long-term CD. This means that when you're investing the same amount for a similar period of time, the CD will give you a better return because of the higher interest rate.
There's one scenario in which a savings account could end up being more lucrative than a CD. Suppose you had $1,000 in a bank savings account. Suddenly, you discover a fantastic investment opportunity promising a huge return, but you must act quickly. You simply go to your bank and make a withdrawal, and you can purchase your one-way ticket to "Fat City." If you had invested the money in a CD instead, you wouldn't have the same easy access to your money. If you decide to make a premature withdrawal, you'll also have to pay any applicable penalties.
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