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Investing in CDs: Strategies and Benefits

Why Invest in CDs?

Certificates of Deposit (CDs) offer a low-risk way to invest your money. After making an initial deposit, your investment will earn interest until the account matures. You’ll get your money back, along with your earnings, when the term ends. Here are some reasons to consider investing in CDs:

• Competitive Interest Rates: CDs often offer higher annual percentage yields (APYs) compared to traditional savings accounts. For instance, while the average APY for a savings account was 0.45% in July 2024, some CDs offered APYs as high as 5.35%.
• Peace of Mind: CDs offered by banks are generally FDIC insured up to $250,000 per depositor, providing a safety net if the financial institution becomes insolvent.
• Guaranteed Returns: Unlike stocks, which can be volatile, CDs provide a guaranteed rate of return. The only risk is an early withdrawal penalty if you pull your money out before the term ends.

How to Invest in CDs

Investing in CDs can be straightforward if you follow these steps:

Research Different CDs

Start by learning about the various types of CDs available. Some CDs don’t charge early withdrawal penalties, while others allow you to increase your interest rate during the term.

Consider Your Timeline

Think about when you want to access your money. This will help you determine the right CD term, especially if you’re opening multiple CDs.

Shop Around

Compare CD offers from banks and credit unions, including brokered CDs, which may offer higher yields. You can also hold multiple CDs within a single brokerage account.

Open the Account

You can apply for a CD in person or online. You’ll receive a disclosure statement outlining important information, such as how often interest is paid and whether the CD is callable. Fund your account with the minimum opening deposit, which typically ranges from $500 to $2,500 or more.

Leave Your Money in the Account

Once your CD is up and running, there’s nothing more to do on your end. Just avoid withdrawing money before the term ends to avoid penalties.

3 CD Investing Strategies

Being strategic about how you invest in CDs can pay off in the long run. Here are three different approaches to consider:

CD Ladder

Building a CD ladder involves opening multiple CDs with varying terms. This spreads out the maturity dates, providing a stream of staggering returns.

How to Do It

Open three CDs with different terms (e.g., three months, nine months, and 12 months). As each CD matures, reinvest the money into a new CD or use the funds as needed.

Who It’s Best For

CD laddering is ideal if you’re concerned about liquidity and don’t want all your money locked up for extended periods.

Pitfalls to Avoid

Stay organized and know when each CD expires. Be aware that some CDs automatically renew, and always research accounts to find the best ones for your goals.

CD Barbell

With a CD barbell, you divide your cash between two CDs—one long-term and one short-term. This allows you to lock in potentially higher long-term interest rates while keeping some money accessible.

How to Do It

Research CDs that align with your goals and split your funds between the two accounts. Decide whether to reinvest your cash or use it for a financial goal as each term ends.

Who It’s Best For

A CD barbell is suitable for those looking for a low-risk investment that keeps a portion of their money accessible.

Pitfalls to Avoid

Stay on top of your accounts and remember when each term ends. Early withdrawals may incur penalties.

CD Bullet

With a CD bullet, you open multiple CDs that all expire around the same time, potentially resulting in a financial windfall when they mature.

How to Do It

Decide when you want to cash in on your CDs and open them accordingly. For example, open a three-year CD today, a two-year CD a year later, and so on.

Who It’s Best For

This approach is effective if you have a specific financial goal, such as buying a home or taking a vacation, at a particular point in the future.

Pitfalls to Avoid

Interest rates could rise after you’re locked into your accounts. Research to find the best rates and terms for your situation.

Frequently Asked Questions

Can CDs Lose Money?

CDs are generally low-risk, but you could lose money if you withdraw funds before the term ends, incurring penalties.

Should I Put All My Savings Into CDs?

It’s essential to stay diversified. While CDs are a safe investment, consider spreading your money across different assets to mitigate risk.

How Do I Find the Best CD Rates?

Shop around and compare offers from various banks and credit unions. Look for the highest APYs and terms that align with your financial goals.

The Bottom Line

When investing in CDs, consider your financial goals and timeline to choose the right strategy. Diversifying your investments can help you secure solid returns while mitigating risk.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions.

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