Most investments have a degree of risk to them, but offer the potential to increase the amount of money you save. Many people aren't as aware of what you can do with Certificates of Deposit in your investing strategy as they are with other forms of investments, so here are 5 secrets to successful investing with CDs.
1.The money you deposit is “safe”. Unlike many types of investments, money saved in a Certificate of Deposit that is purchased through an FDIC insured bank means your deposit is guaranteed by the federal government. As long as you don't withdraw the money before the Certificate of Deposit matures, you aren't at risk of losing your deposit.
2.Only invest money you don't need to access into a CD. Even though you aren't at risk of losing the money you invest in a Certificate of Deposit, you need to be sure you won't need to pull your money out before the specified maturity date. If you take money out of a Certificate of Deposit before it's “matured”, you pay a penalty fee (which will decrease the amount of interest you may have earned, and maybe even cause you to withdraw less than your original deposit – depending how much the penalty fee is!)
3.Higher rates of interest are offered through certificates of deposit than savings accounts. Even with higher-interest savings accounts found online, you can almost always find a certificate of deposit with a better interest rate. The reason for this is because you are essentially giving the bank a loan when you deposit money for a specific period of time in a CD. They know they have 3 months, 6 months, 1 or 10 years to use your money, and in exchange for that “loan” they offer you a higher rate of interest than they can with a savings account. Money in savings accounts can be withdrawn at any time, without any penalty, and therefore the money held in a savings account is less reliable for the bank and receives a lower interest rate than a certificate of deposit.
4.Using a Certificate of Deposit ladder will maximize your savings through certificates of deposit. CD laddering is a method of staggering your maturity dates on multiple Certificate of Deposits, which enables you access to parts of your money at different intervals, so you should never have a need to withdraw money prior to a maturity date and have to pay a penalty. Each time a CD matures, you can withdraw without penalty or re-invest into another Certificate of Deposit or investment of your choice.
5.There is more than one type of Certificate of Deposit. Many people aren't aware that CDs have a little variety to them! While the traditional CD is the most popular, there are also “bump up” CDs which allows you to receive a higher rate of interest if the rates increase before your CD matures; and “liquid” Certificates of Deposit, which makes it possible to withdraw money penalty free before maturity is reached. Other CD variations include callable, zero-coupon, brokerage and high-yield, which all have slight variations of the traditional Certificate of Deposit.
With these 5 “secrets” for Certificates of Deposit, you should be well on your way to deciding whether or not an investment with CDs should be part of your financial portfolio.