One among the many bank accounts available to depositors, Certificates of Deposits (CDs) is one of the most favored. They combine less risk with more returns. CDs are basically time deposits held for a specified time frame, from 3 months to 6 years and carry a fixed interest rate.
Return on CDs
CDs are more rewarding than your regular savings accounts. Longer the duration of the CD, higher would be its interest rate be. Currently, a 3 year CD with offers you a 0.5% return. A higher percentage (1%) is offered by credit unions.
The CD rates are quoted as APY, which factors the interest compounding frequency. Interest compounding varies between banks. Some do it annually, a few of them half-yearly, and a few others quarterly or even on a daily basis.
Safety
CDs score high on safety. They are secured by FDIC up to $250,000 making them a very safe choice. It’s best to hold CDs with banks that enjoy the federal coverage. Look out for the FDIC sign at the teller window.
Types Of CDs
- Variable Rate CD
While in general CDs are attached to a fixed interest rate, variable CD rates are linked to a prime interest rate. This could either be the market index or the Treasury Bill rate. When there is a potential interest rate hike, you stand to gain. You ought to be prepared to face a fall in the interest rate as well.
- Liquid CD
Premature withdrawal attracts substantial penalty. Liquid CDs charge a low or no penalty in case you withdraw early. The rate of interest is low, but you enjoy access to your funds. However, you need to maintain a minimum balance.
- Jumbo CD
A high investment CD, usually $100,000 and upwards, these deposits fetch you higher returns.
- Callable CD
While the choice of CD term rests with the depositor, in the case of Callable CD, the bank has the option to cut short the CD term. The silver lining is these deposits carry a comparatively higher rate. - IRA CD
It is a regular CD with its fixed rate and tenure held in a tax-advantaged person’s retirement account. - Laddering CDs
CDs, no doubt fetch better returns that the standard savings account. A better option is to maximize your return by using the technique of laddering.
All of you are aware that the premature withdrawal of a CD entails a hefty penalty, which can escalate to loss of deposit as well. The best way to ensure accessibility to funds, earn returns and avoid the penalty is by laddering your CDs.
In this technique, instead of having a lump sum CD, you split it into multiple CDs of varying terms. While the long-term CDs can fetch you a higher returns, the short-term CDs will improve your liquidity.
CDs are a good option indeed. Backed by federal insurance, you can earn a solid return from CDs. Choose the right type, and take the benefit of laddering. Your savings plan will get a good boost.