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An Intro to Certificates of Deposit
Do you need to save up money to buy a new home and be able to afford your Kansas City mortgage rates? Consider getting a certificate of deposit (CD). A CD is a common savings certificate that offers a low risk investment with a good return on investment (ROI) depending on how long you plan to invest the money.
CDs can be Long or Short Term
CDs are a virtually risk free investment, so they tend to have lower interest rates. To reap the benefits of a CD, you deposit your money for a determined period of time from 1 month to 5 years. In that time, you earn interest on it based on which bank holds the CD, since interest rates can vary from bank to bank. Interests can increase in some banks and some offer CDs whose rates can increase.
Only Invest What You Don’t Immediately Need
CDs can range from $1,000 dollars to over $100,000. If you invest more than 100,000 you will have invested in what is known as a Jumbo CD. Besides the name and higher interest rates, Jumbo CDs operate the same way as smaller CDs. CDs have a good insurance policy of $250,000 and are insured by the FDIC.
Remember, you will get penalized if you withdraw money early. With that in mind, it’s a good idea to only invest money you know you won’t be using for a predetermined length of time. If you have a spare $1,000 that you know you can safely invest for a month, you can invest it into a CD.
Have a Diverse Portfolio
When a CD matures, you can wither withdraw the money and the interest earned, or reinvest the money again into a new CD. To reduce risk, it’s recommended that you deposit your funds into CDs at multiple banks so you don’t put all of your eggs into one basket, so to speak. Having a diverse portfolio will give you several interest rates so you can get the best ROI.
Also, don’t let your CD automatically roll over into a new CD. The interest rates may have decreased and you won’t get a good yield. So when you bank notifies you that your term is ending, be sure to withdraw it when it’s over. If you want to reinvest it, shop around to find a good deal.
Reduce Risk by Laddering
It’s recommended that you “ladder” your CDs if you are investing a large amount of money. Laddering helps reduce the drawbacks of CDs by putting money in several CDs with varying durations. For example, if you invest $15,000, you would put $5,000 each into a one year, two year, and three year CD. By doing so, your mature dates are “laddered,” allowing you to withdraw your money and put it into your savings account or reinvest elsewhere.