Learn About CD Rates
First you must learn more about CD rates. With interest rate returns on CD's at historic lows, many people aren't aware of all of the facts that they need to in order to make an informed decision about investing in CD's today. Those with decimated stock portfolios and huge losses in their 401K's have become risk adverse. It's better to grow your money slowly rather than risk losing it altogether. This is why learning about CD's, their different rates and terms, and how to use them to your advantage, can help you recover some of your losses as well as let you sleep better at night.
CD's and Best Rates
Where do you look for CD's with the best rates and terms for you and your investment needs? Though they can be found with various brokerage companies and financial institutions, your best bet is to go with CD's offered by banks. While online banks typically offer a slightly higher interest rate since they have less overhead, don't overlook the regular brick and mortar banks. Each of these venues has both advantages and disadvantages. The one thing you must be certain of wherever you decide to purchase your CD or CD's, is that each and every entity where you hold one is insured by the Federal Deposit Insurance Corporation. Remember not to have more than $100,000 in any one institution. Though these limits have temporarily been raised, it is always better to be on the safe side, particularly where your money is concerned. Research is available online to help direct you to various banks with higher interest rates and various terms, depending on your particular needs.
Highest CD Rates
Sometimes going with the highest rate offered in the marketplace is not necessarily in your best interest. For example, if you are placing your money in a CD with an online bank and an emergency or a once in a lifetime investment opportunity arises, you will not be able to get that money out before the maturity date, whatever that may be, without incurring significant penalties. Sometimes you could lose not only your potential interest earnings, but a small portion of your principal as well. So don't overlook the physical bank around the corner where you may have a checking, savings, or money market account already. Your interest rate on a CD there may be slightly lower than an online bank's rate, but you would have the ability to borrow against that CD or use it as collateral, to meet whatever need has come up unexpectedly without incurring any penalties or fees for early withdrawal of your CD.
Something else you need to know about CD's is that while low risk, the interest you earn on them is considered taxable income unless they are set up in an IRA with a deferred tax or even better in a tax-free Roth IRA where there is no tax for withdrawal if you meet the age requirements. Here is where you might be thinking low risk equals low return so why should I bother with CD's? My money will be tied up for a predetermined length of time which makes it virtually inaccessible to me without actually losing money. Also, unlike money market or savings accounts, or even stocks, you have no liquidity to speak of. These are indeed considerations. However, there are some ways around this liquidity problem and this is information you should explore.
One of the best ways to have your cake and eat it too is with CD laddering. This is a form of spreading out your CD's among various banking institutions, whether online or off, credit unions or brokerage firms, or whatever means are available to you. The purpose of CD laddering is to have a number of different CD's of varying amounts, with varying interest rates, maturing at varying times. This gives you the flexibility to be able to access your money from one of these sources without incurring penalties should the need arise.
CD Investment Portfolio
What does this mean for your CD investment portfolio? When the Federal Reserve cuts short term interest rates and it appears that rates are going to drop soon, then put money in the highest yielding CD that you can find for a short term period, which would typically be between 6 and 12 months, so that you are locked in at the higher rate. This means that you must stay on top of varying CD rates and what is happening with the FED. If you buy a new CD before any rate cuts you can limit your own personal interest rate reductions. True, we are not talking about huge sums of money, but every little bit adds up over time.
The Power of Compounding Interest
Also, never underestimate the power of compounding. Even at today's unglamorous interest rate returns on CD's, not only are they safe investments, but that money will be there when interest rates rise, which they will. You will reap the benefits that can help offset some of the devastating losses to your current financial portfolio. Do your research and spread your CD's out in location, dates of maturity, and interest rates. You won't be sorry!