High Interest Saving With Certificates of Deposit
High interest saving becomes interesting after debts are cleared and emergency fund established. Certificates of deposit offer higher interest over fixed period of time.
High interest saving with certificates of deposit (CD) pay higher yields than liquid savings accounts, but to earn that, you need to let someone else hold your money for a specific period of time. Once you've grown your liquid savings account to create your emergency fund, you should consider a longer-term investment with high interest saving. One of the most common fixed-income investments is a CD. You can use different types of CDs and various strategies to earn the most income from them.
Certificate of Deposit (CD)
A certificate of deposit is an excellent way to save money and earn a higher interest rate than you would with most money market investments. The drawback is that CDs are not liquid; you're tying up your funds for a period of time, and if you cash out early you'll lose interest and possibly principal.
Saving in CDs is high interest saving for fixed period of time. CDs are most often issued by banks but can be purchased through brokerages. Some banks might require you to come into the bank to open a CD account, others may let you open one online.
Typically, you invest a fixed amount of money for a predetermined amount of time (time deposit). In return, you're guaranteed a fixed amount of interest, which is added to your account periodically. When the CD expires, you can cash out or roll over the CD for another one. Early cash-out has interest and possible principal implications.
CDs can be purchased for terms of almost any duration although the most popular are between three months and five years. Almost always, the longer you allow the bank to use your money, the higher your interest rate. Generally, it's not a good idea to buy a CD with a longer duration, since the interest rate situation could change dramatically during that time and you could get stuck with a long-term, low-rate CD.
Alternative Types of CDs
The traditional certificate of deposit remains the most popular, but a growing number of financial institutions are offering a variety of more flexible alternatives. If you're ok with not so high interest saving, you can find CD options that might better suit your financial needs.
- Bump-up CDs allow you to take advantage of a rising rate environment and the drawback is you may get a lower initial rate.
- Liquid CDs offer consumers the opportunity to withdraw money without incurring a penalty, although you may have to maintain a minimum balance in the account.
- Zero-coupon CDs have deep discount to par value, the amount you'll get when the CD matures instead of periodical interest payment.
- Callable CDs give bank an option to "call" it away from you after the call-protection expires and shifting interest rate risk onto your shoulders.
- Brokerage CDs are simply sold through a brokerage and often pays higher rates since they compete in a national marketplace.
- High-yield CDs are offering better than average rates.
High Interest Saving Investment Strategy
Clever investors keep a portion of their portfolio in fixed-income investments like high interest saving in CDs, which presents a non-correlated part of the investment portfolio with the stock market.
Since interest rates also rise and fall you need a strategy, preventing you from being caught in a slump economy where interest rates are in a prolonged low-rate cycle. You don't want to get stuck buying a bunch of long-term CDs with low interest rates. Money saving experts advice an investment technique that requires investors to purchase multiple financial products with different maturity dates and then constantly reinvesting by replacing the longest maturity. This approach helps you to beat lengthy low-rate cycles and offers you advantage of keeping some liquidity. This approach also takes advantage of the fact that almost always highest interest rates are paid to the longest term CDs.
The most important thing to keep in mind is to make sure the maturities suit your cash flow needs. Penalties for early withdrawal will squash your returns. Banks are free to set their own penalties and there is no maximum limit. Make sure there's enough cash in your emergency fund to carry you through until the shortest CDs matures.
Written by: Goran Dolenc
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