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CDs: A Secure Investment in Uncertain Times
How Certificates of Deposit can stabilize your portfolio as rates decline.
Hey there Money Saver! Welcome back to another week of How to Save A Buck, where we explore ways of saving money in personal finance, credit cards, and investing! Check out my archive here!
Most young investors like to chase the hottest new investment.
Bitcoin. Venture capital. Stablecoins.
They might be exciting, but they are the riskiest investments out there.
In personal finance, finding a stable investment that offers security and a reliable return is crucial. Certificates of Deposit (CDs) are powerful tools for investors, especially during decreasing interest rates. You are loaning your money to a bank.
I recently capitalized on this strategy by locking in two CDs at attractive rates before the current rate decline: one at 5.05% APY and another at 4.7% APY, each for 12 months.
Why did I do this? Because in anticipation of lower rates publicized by the Federal Reserve and other institutions, I wanted to lock in higher rates (getting more interest for my $). My current savings account is earning 3.9% APY.
I moved money from my savings account and locked in the CDs.
my current Savings account interest rate APY
Question: Why is this important? It may not make a huge difference if you have a few hundred dollars, but for $25,000, $100,000, or more, this 1.00% APY difference can score you hundreds more in interest.
Example: $25,000 x .039% = $975 (excluding compound interest)
$25,000 x .049% = $1,225 - a difference of $250 over a year (excluding compounding)!
For $100,000, the difference grows to $1,000 more money per year in your pocket!
Why CDs Are Worth Considering
1. Guaranteed Returns: CDs offer fixed interest rates over a specified term, providing predictable returns regardless of market fluctuations. This makes them an excellent choice for risk-averse investors looking to preserve capital.
2. Low Risk: Backed by the FDIC up to $250,000, CDs are among the safest investment vehicles, protecting your funds from bank failures.
3. Competitive Rates: While current interest rates are declining, CDs often provide higher yields than traditional savings accounts, making them attractive for generating income.
Bankrate current average stats
4. Diversification: Including CDs in your portfolio can help reduce overall risk by balancing higher-risk investments like stocks and mutual funds.
Characteristics of CDs
- Term Options: CD terms can range from a few months to several years. Generally, longer terms offer higher interest rates.
- Maturity and Penalties: Funds are locked until maturity; early withdrawals usually incur penalties, which can vary depending on the institution. Make sure you are comfortable locking up your funds!
So what should an investor do?
Consider a CD now to earn a higher yield on your rainy-day money. These are funds you can part with for an extended time, and beat the current rate on a savings account, even if rates do not fall further.
You could even consider a CD ladder, highlighted earlier this year.
Check out Bankrate.com for some leading options (most of the higher CD rates will be from online banks).
Shop around, note the minimum deposit amounts, and feel confident that locking up your $$ will enable you to earn more in your pocket.
CDs are boring. And that’s the way investments should be.
Save On,
Chris