CD Investing Strategies: Things to Consider

Anyone interested in investing has heard of a certificate of deposit, or CD. It’s a financial product similar to a savings account. Where a CD differs, however, is that it has a specific, fixed term, and a fixed interest rate. It is intended for a CD to be held until maturity, at which time the money may be withdrawn together with the accrued interest, or rolled over into a new CD term.cd-investing-strategies

Most banks offer a variety of CD terms. Term lengths can range anywhere from six months to 5 years or more, depending on the financial institution.

At Bank5 Connect, we offer CDs with terms of 6, 12, 18, 21, 24, and 36 months. And the minimum deposit to open a Bank5 Connect CD is only $500.

While CDs provide a safe, guaranteed return on your investment, getting the most out of them requires you to think strategically. Here are some tips to help make your CD work for you:

  • Give thought to the length of your CD term. When your money is tied up in a long-term, multi-year CD, you run the risk of missing out on higher-yielding opportunities. A lot can change over the course of several years, and rates are no exception. The Federal Reserve meets every six to seven weeks about whether or not to change interest rates. Think of how disappointing it would be to see rates rapidly increasing around you, and all of your investing dollars are locked up in an underperforming CD for 4 more years.
  • Don’t withdraw your money from a CD before it matures. It’s important to understand all of the penalties associated with taking your money out of a CD before it reaches maturity. Doing so can take a huge bite out of your earnings. For a CD with a term of a year or more, the average penalty for withdrawing your funds early is six months’ worth of interest. In some cases, early withdrawal penalties can even dip into your principal if the CD hasn’t been opened long enough to cover the penalty fees through interest.
  • Do your homework regarding rates. If you don’t shop around for the best CD rates, you could end up missing out on some real bargains. With the internet at your disposal, it’s easier than ever to compare the CD products offered by various financial institutions. Using the comparison tools available on sites like DepositAccounts.com, it’s easy to find the most competitive CD offerings before choosing which to invest in.
  • Know when your CD is nearing maturity. Most financial institutions will automatically roll the funds in your CD over to a new CD with similar terms once it matures, unless you instruct them otherwise. However, allowing a CD to automatically roll over to a new term could be a costly mistake if you haven’t evaluated all of your other options. It pays to assess other investment opportunities to ensure you’re putting your money in a place that makes sense for you given your current situation and financial goals.
  • Use CD laddering to help generate a stream of interest income. A CD ladder could be a great was to prevent your funds from being unnecessarily tied up. This type of investment strategy involves setting up a collection of CDs that will mature at different intervals so you regularly have funds becoming available. For example, if instead of putting all of your investment dollars into an 18-month CD, you split those dollars three ways and open a 6-month CD, a 12-month CD, and an 18-month CD, you will have funds becoming available every 6 months, and a third of your money will still be earning interest at an 18-month rate!

With a little strategic thought, investing in CDs could be a great opportunity to earn some extra cash. But remember that it’s always best to consult with a tax advisor before making any major financial decisions. To learn more about the CDs offered by Bank5 Connect, visit http://www.bank5connect.com/home/cds.

Deciding on a CD Term Length

If you’ve made up your mind that you’re going to invest some money this year, you might be considering a CD, or certificate of deposit. CDs are commonly viewed as a safer alternative to potentially higher-yielding investment vehicles such as stocks or mutual funds, because fixed-rate CDs have a set, guaranteed interest rate, and they’re protected by FDIC insurance. Bank5 Connect CD accounts are actually covered by both FDIC and DIF insurance. The DIF coverage at Bank5 Connect ensures that all deposits are 100% insured, even past traditional FDIC coverage limits.cd-term-length

Not surprisingly, the safety of CDs, coupled with the fact that they generally offer higher interest rates than traditional savings accounts, makes them popular choices for saving money. If you’ve chosen a CD as one of your investment tools, it’s just a matter of deciding how long you want to tie up your funds. With CDs, you have several fixed term lengths to choose from. They can range from as little as 3 months to up to 10 years. The term you select will depend on your unique financial circumstances and needs.

When considering CDs, it’s important to note that they’re intended to be held until maturity. When they mature, you have the option to withdraw the money, along with any accrued interest, but if you withdraw any money before the entire term length is up, you’ll usually be hit with an early withdrawal penalty fee. The policies regarding early withdrawals vary, so it’s always wise to check with your financial institution prior to opening an account to see what kinds of penalties you could incur.

To avoid early withdrawal penalties, it’s a good idea to choose a CD term based on how long you think you can go without needing access to the money. If you anticipate needing to tap into the funds within a few months, then a 3- or 6-month CD will probably be the way to go. Keep in mind however, that typically the shorter the term length, the lower the interest rate.

Generally, multiple year terms offer the highest CD rates. If you know you won’t need to tap into the funds for several years, a multi-year term could be a good fit, but it’s a good idea to consider current interest rate trends and predictions first. Think about it. How angry would you be if you locked in a 2.00% rate on a 5-year CD only to find that the rate on that exact CD increased to 2.50% a few weeks later? Once you’ve opened a fixed-rate CD, your rate won’t change, even if the bank starts to offer the same CD at a higher rate. To help avoid this kind of scenario, it’s a good idea to stay on top of interest rate news, so you have some kind of idea of when rates could fluctuate.

Another consideration with CDs is how often you’ll be looking to stash away more money. Generally, once you open a CD you can’t add money to it until it matures. Therefore, if you think you’ll want to add money every few months, a shorter term length might be best. Another option is to choose an add-on CD. Add-on CDs are special fixed-term CDs that allow you to deposit additional funds throughout the entire term length. These types of CDs can be hard to find, but Bank5 Connect does offer one. Bank5 Connect’s 24-Month Investment CD allows for additional deposits at any time, in any amount. Plus, there is only a $500 minimum deposit required to open an account, and no monthly maintenance fees.

If you have enough money to open several CDs, another way to allow for ongoing deposits is to invest in multiple CDs with various term lengths. This approach is known as CD laddering. With CD laddering, you end up with a collection of CDs that will mature at regular intervals. With a CD regularly reaching maturity, you’ll regularly have an opportunity to make additional deposits, or withdraw your funds.

No matter what CD term length best suits your needs, just remember to read all of the fine print associated with the account before opening one. This will help you to understand exactly what you’re getting into, and help you to avoid costly early withdrawal penalty fees. And, keep in mind that it’s always a good idea to consult with a tax adviser or financial professional before making any major investment decisions!

CD Laddering Helps Provide An Investment Balance

Striking a balance between having investments that provide solid returns while still having financial flexibility can be a challenge. But an approach called CD laddering can help you maintain that balancing act.cd-laddering-helps-provide-investment-balance

First, a little refresher about CDs, or certificates of deposit. A CD is also known as a “time deposit” or a “term deposit” because it’s set for a certain period of time. The depositor can choose which term they want to go into. CDs are a great way to earn a competitive interest rate and not have to think about setting money aside on a weekly or monthly basis like you would with a savings account.

Essentially, you put your money in the bank and you know that after your CD term expires, you’ll be able to get your money back with interest that is guaranteed and fixed. There are short-term and long-term CDs available at most banks. Short-term CDs can range from 6 months to a year, while longer terms typically range between 18 months and 5 years.

You can access money in your CDs before they are fully matured, but be prepared to pay a penalty for early withdrawal. On the other hand, if you structure your CDs with a little thought, you can help avoid early withdrawal penalties. This is where CD laddering can help provide financial flexibility.

CD laddering is a great way to be able to have money tucked away and earning a competitive interest rate, but also have access to the funds at regular intervals. There are a lot of different ways to approach CD laddering, depending on the individual’s investment strategy.

CD laddering involves buying a series of CDs at regular intervals so that they’ll mature at regular intervals as well. So over the course of the CDs’ maturity you have access to funds on an ongoing basis.

For instance, imagine you are opening three CDs – each with a $1,000 deposit.  You open a 6-month CD, a 12-month CD, and an 18-month CD. With this type of “CD ladder”, you will have funds becoming available every 6 months, because you’ll have a CD maturing every 6 months. But, at the same time, you’ll have at least some of your funds in a longer-term CD, and a longer term usually means a higher interest rate.

Using this approach, you regularly have a CD maturing, and its funds becoming available. If you decide you want to only use a portion of the funds once the CD matures, you could take out the interest that you’ve earned and roll over the principal into a new CD.

If you have some CDs that are shorter term with a lower interest rate and some that are longer term with a higher interest rate, you benefit because if you average out all the rates, it’s as if you had a longer term CD all along. That’s why financial experts advise having a mix of both.

And CD laddering can also involve rolling over short-term CDs to longer terms at higher interest rates. With this strategy, you end up with several CDs with long terms, but they mature at regular intervals, giving you access to funds if you need them.

To learn more about the CDs that are available at Bank5 Connect, go to http://www.bank5connect.com/home/cds. And while CD laddering may fit in nicely with your overall investment strategy, remember that it’s always wise to consult with a tax adviser before making any major financial decisions.