Liquid CDs

Chances are that most people have heard of a certificate of deposit (CD) but many individuals may not be aware of a special type of CD known as a liquid CD or a no-penalty certificate of deposit. With a normal certificate of deposit, the investor is locked into a fixed rate until the maturity of the certificate. However, the purchaser can withdraw the funds before the maturity date but they will be faced with very high penalties for doing so. With a liquid CD, the investor is allowed to withdraw any amount from the original investment at any time. There is no penalty for withdrawal before maturity date but there are some restrictions.

Restrictions on Liquid CDs
Other than a normal certificate of deposit, liquid CDs are often compared to a normal savings account. With a normal savings account, you can deposit or withdraw any amount at any time with no penalties and very few restrictions. However, the interest rates on savings accounts are notoriously very low. Now when we are talking about liquid CDs, the restrictions are what distinguish them from your typical savings account. The restrictions will vary depending on the financial institution that is issuing them. Most banks will make the purchaser wait 6 to 10 days before being able to make the first withdrawal. Oftentimes, there are restrictions on the amount of withdrawals made and the time interval between them. Nonetheless, even with these restrictions, a liquid CD allows the investor to have the comfort of being able to access their money if an emergency arises.

Downsides of investing in liquid CDs
One of the most often mentioned downsides that keep many investors away from these types of CDs is the fact that many liquid CDs require a high minimum investment amount to start with. However, a smart investor can still find liquid CDs that have no minimum amount requirements so do not let this small obstacle stand in the way. Some banks will drop the interest rate by as much as 1% if an investor drops below the minimum required capital or exceeds the maximum number of withdrawals. A smart investor will find the liquid CD that is most suitable to their own needs and meets their expectations of returns. A little homework and shopping around can mean the world of difference when it comes to getting the highest interest rates possible. Interest rates on liquid CDs have recently been reported anywhere from 0.35% to over 1.35%. This is why researching the right financial institution is so important for the savvy investor.

Another downside to purchasing liquid CDs is the fact that the investor will not enjoy the same high interest rates that a typical certificate of deposit yields. In fact, some liquid CDs will have interest rates that are over half of what they would be if there were no liquidity option. Many advisers will point out the fact that an investor should determine rather or not they actually need the liquidity option before purchase. Nonetheless, a liquid CD offers some peace of mind knowing that money is not locked up until maturity date or more importantly, locked in at a lower interest rate should the market change.

In conclusion, liquid CDs can be taken as meeting the needs of both worlds but not the best of them, especially when we talk about interest rates. They combine the interest rates that a certificate of deposit enjoys, albeit not quite as high as normal CDs, and the safety net and convenience of withdrawal that are experienced with a typical savings account. A smart investor will do the necessary research and find the best financial institution to purchase a liquid CD that best fits their individual needs.

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