When talking about investment methods, selecting the best type for your financial goals and setting a pragmatic timeline for achieving those goals is critical. For instance, if your goal is to pay for the down payment of a new home, and your timeline is two years, then you would like to select investment strategies that support those two goals. In this case, if you already have some money set aside for your deposit, a two year certificate of deposit would be an acceptable sort of investment to include in your total plan. Although not all CDs are the same, which makes it vital to learn as much as you can about different types of CDs before investing.
There are two kinds of CDs; standard CDs and callable CDs. Normal CDs are what you are probably most familiar with; with these you pay a deposit of cash into a banking institution, and they hold your money for a set time period. After that period, they pay your money back to you, and interest. A callable CD is one in which the banking institution can “call back” the CD at any time after the call-protection period, but before the CD’s maturity date. For instance, a two year CD with a six month call-protection period could be called back by the bank at a year.
But is this a unpleasant thing? It is dependent on your risk tolerance. Say you invested in a callable CD at a high interest rate, and six months later the rates drop. Your bank could call back the CD before it matures; you’d still get your investment back, but without the quantity of interest you had planned on. You could then reinvest in another CD, but at lower interest rates. This may or may not be an option for you; it relies on your risk tolerance. For many financiers however, when doing CD rate shopping they stick with standard CDs, and simply look for the highest rates they can find.
To choose which kind of CD is good for your investment goals, you’ve got to match them to those goals. For example, let us take a look at the example used above. If your 2 year goal is to save sufficient bucks for a down-payment on a home, traditional CDs would be best, because they can’t be called back during those two years. In this example, you would wish to shop for traditional CDs with the best CD rates, while avoiding callable CDs.