People looking for safe investments often turn to certificates of deposit, or CDs, to earn interest and protect the value of their portfolio. CDs held at banks are insured up to $250,000 by the Federal Deposit Insurance Corp. (FDIC), making them a safe investment choice.
Fixed or Variable Rate
Certificates of deposit pay interest from income that the bank earns from loaning the money that you placed on deposit. The interest rate may be fixed over the period of the CD, or it may be variable and change according to an index that the bank establishes. A variable interest CD may also change its interest rate at specific times during the life of the CD that are established when the CD is opened, and are not linked to an index.
Maturity Date
In exchange for a higher rate of return, a depositor agrees to leave his money on deposit with the bank for a specific period of time that ranges from three months to five years or longer. This helps the bank plan its cash reserves better and the ability to plan makes it worth it for the bank to pay a higher interest rate. Generally, the longer the term of the CD, the higher the interest that it pays.
Staggered CD
Many experts recommend "staggering" or "laddering" your CDs. This involves spitting up your investment money into equal parts and investing them into CDs with different maturity dates. You can split a $4,000 investment into four different $1,000 investments, and invest these parts in four different CDs. The first CD would mature in three months, and next CD would mature in six months. With two more CDs adding an additional three and six months to the second CD, one of your CDs would always mature within three months. When each CD expires, you renew it for six months. This can keep you from locking in to lower interest payments for too long if interest rates go up.
Interest Deposits
CDs handle the interest that they pay in different ways. Some CDs add the interest in to the same deposit account, which means that you cannot access the interest until the maturity date of the CD. You can arrange for some CDs to deposit the interest income into another savings or checking account so that it is completely liquid and accessible. Some CDs will also send you a check directly each month for the interest amount. This is a good option for people who depend on interest income for living expenses.
