Do you know how a CD’s automatic renewal policy could cost you a lot of money? Understanding your certificate of deposit (CD’s) maturity date could save you money by avoiding a penalty.
I discuss Certificate of Deposits in my ebook Simple Investing. From the perspective that they are a simple investment vehicle if you’re looking to park some cash for a while. Or maybe you’re retired and looking at taking a more conservative approach to making more money with the money you already have.
One of the topics I highlight in the book is a financial institution’s policy of how CDs are handled as they reach their maturity date.
A Quick Recap on Certificate of Deposits
CDs are a type of financial product where you earn an interest rate that is higher than a standard savings account. A higher interest rate is earned because you commit your money to the financial institution (bank, credit union…) for a fixed period of time. Commit means you cant withdraw your money, without a penalty until after the term.
Typically, the certificate of deposit term lengths range from as few as six months to as long as five years. The interest rate and yield you earn are generally based on the amount of money you assign to a CD and the term length. The longer the term and the more you allocate the higher the interest rate and yield.
The date when your CD commitment ends is called the maturity date. The maturity date is the date when you can remove your money from the CD without penalty.
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What is a CDs Automatic Renewal
Automatic renewal is a policy the financial institution sets up to notify you when your CD reaches its maturity date. And what they will do with the certificate of deposit (your money) if you don’t tell them what to do with it once it matures.
The Key Points You Need to Understand
- Withdrawing your money at any time during a CDs term period will result in a penalty. Depending on the financial institution’s policy the penalty could be not earning interest on the CD. Or as taking some of the principal (your money) that you originally placed in the CD.
- In general, you will be notified prior to your certificate of deposit reaching its maturity date. This typically takes place a week or two before the CD reaches its maturity date and will be done via mail, email or both.
- Once the CD reaches its maturity date you will have a specific number of days to determine what you want to do with the money. Most institutions will provide anywhere from a five to 15 day grace period before automatically renewing the CD. After the grace period, the CD will be renewed for the previous term length.
- The options for your money once the CD matures are; let the CD renew for another term. Choose a different term, or withdraw your money and the interest you have earned.
- If the CD automatically renews without you knowing it, your money will be locked up again for another term. And you won’t be able to withdraw it without a penalty.
The Bottom Line
Allowing your certificate of deposit to renew for another term can be a simple and risk-free way of making more money. Successive renewals allow you to take advantage of the compounding effect of money. Which means over time you will earn interest on the interest from the previous term(s).
However, if you are planning to use that money in the future to purchase a car or for a down payment on a home getting locked into another term could prove costly.
Before you lock your money up in a certificate of deposit. Ask your financial institution these five questions.
- Will I be notified before my CD reaches its maturity date?
- How many days prior to the maturity date will I be notified?
- How will I be notified? Email? Mail?
- What is the grace period before my certificate of deposit renews.
- What are the penalties for early withdrawal?
Regardless of how your financial institution manages their automatic renewal policy, it’s always a good idea to set up your own reminder of when your CD(s) will reach maturity. That way you’re in control and you can make informed decisions with your money.
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Have you ever had a certificate of deposit automatically renew without you knowing it? Comment below.