Are Liquid CDs Suitable to Average Investors?
Liquid bank certificates of deposits, known as liquid CDs appear to be an attractive proposition but in truth, liquid CDs are not suitable for every investor. Liquid CDs have only one main advantage. If you withdraw your deposit amount before the maturity of the certificate of deposit, you need not pay any penalty with liquid CDs. Banks charge hefty fees for early withdrawal in the case of traditional CDs, if you need the money for any emergency before the maturity date of the CDs. However, the interest rates of liquid CDs are usually lower than that of traditional CDs for the same terms and amounts.
However, the terms for liquid CDs could vary from one bank to another. One bank might offer a liquid CD for seven months with the condition that you could have two penalty free withdrawals before the maturity of the liquid CD but you should maintain a minimum balance of $10,000. If you withdraw more than twice or allow the balance in the liquid CD to drop below $10,000, the bank could reduce the interest rate on the liquid CD by around 1% for the rest of the term of the CD. However, this type of liquid CD offer is not highly popular with investors due to the high minimum amount of $10,000. On the other hand, many investors appreciate and buy offers like a minimum of $5,000 with two early withdrawals on a nine-month liquid CD.
According to federal laws, a minimum of seven days should pass after the purchase of the liquid CD before you could make any withdrawal without incurring penalty. However, banks have the right to fix their own minimum periods for first withdrawal without penalty. Banks also hold the right to decide the number of withdrawals on the liquid CDs, which could vary from a single withdrawal to multiple withdrawals based on the term of the liquid CDs. A few banks completely refuse even a single early withdrawal. Hence, it is necessary to study various liquid CD offers carefully and evaluate which one would suit your needs and requirements. If you are confident that you might not need any withdrawal on the liquid CD before maturity, you might be able to obtain a liquid CD with higher interest rates. Liquid CDs with more withdrawals normally come at lower interest rates. If you desire higher yields and have the capacity to invest for longer periods without the necessity to withdraw before maturity, you should not opt for liquid CDs but look for other types of certificates of deposits that give you maximum yields.
Most of the liquid CDS have very low interest rates ranging between 0.2% and 0.6%. Hence, you would be sacrificing on yield when you opt for liquid CD but you would have better financial flexibility to withdraw early in case of any sudden emergency. In these days of economic uncertainties and instabilities, pink slips or reduction in wages have become quite common. Hence, it is always ideal to have at least a savings of emergency funds to meet requirements for a minimum period of six months. Liquid CDs are ideal investments for such conditions.