What are the factors that will help in deciding between short term and long term CD’s?
Certificates of deposits or CDs as commonly known are financial opportunities that allow investors to lock in a good amount of their surplus money for a predetermined period of time. These deposits if not withdraw before the maturity date, earn very high interest rates.
On the basis of the tenure for which the money gets locked in, certificates of deposits can be of two types, short term certificates of deposits and long term certificate of deposits.
For an investor deciding between short term and long term certificate of deposits becomes very difficult as the basic terms and conditions in both cases are the same.
Deciding factors that will help in choosing between the two plans
The factors that will help in deciding between the two certificates of deposit are as follows:
- Present financial status of the investor will help in deciding between short term and long term certificate of deposits. If the investor is capable of maintaining a strong financial condition irrespective of the amount deposited in the account, then it would be beneficial to have the investment locked in for a longer period of time. On the other hand, if the money is needed in the near future than it would be wise to invest the money in short term CDs and also avail interest benefits.
- Long term certificate of deposits are best suited for regular salaried people who have a fixed source of income and do not need to depend on the funds of certificate of deposits. People with irregular sources of income on the other hand can not take the privilege of getting their money locked for longer periods of time and therefore should invest in short term certificate of deposits.
- Existing market rates play a big role in deciding if the investments should be made on short term or long term certificate of deposits. When the investor thinks of depositing money in a certificate of deposit, he must take in to consideration the rates that are being offered on his deposit. In case of a good interest rate, it would be best for him to invest in a long term certificate of deposit as this will enable greater accumulation of interests on the certificate of deposit. On the other hand if the current market rates are low then it would be best to keep the money locked in for shorter periods of time and then re invest it in other money yielding plans.
- Usually certificate of deposits that are locked in for longer periods of time attract higher interest rates than short term certificate of deposits.
Analyzing the above factors will help an investor decide if short term or long term investment certificates of deposit is best for him.