CDs Offer Safe, Predictable Returns

Learn how to get a better deal then you would with a regular savings account.

Jan 5, 2014 at 2:00PM

You've probably seen ads from financial institutions touting the interest rates of their certificates of deposits, all competing for your savings. CDs offer safe, predictable returns at higher interest rates than you can receive from a savings account. Like savings accounts, the Federal Deposit Insurance Corporation insures CDs, with the balance of your CD accounts counting toward your total insured amount. Credit unions also offer CDs, which are insured by the National Credit Union Share Insurance Fund, or NCUSIF.

CDs are time deposits that the bank accepts for a fixed term -- usually three, six, or 12 months, or up to five years. At the end of the term, you can cash in your CD for the principal and the interest you've made or roll the CD balance over into a new CD of any duration you'd like.

You must tell the bank what you've decided to do before the CD matures. Otherwise, the bank probably will automatically roll over your CD into a new one with the same term, but at the current interest rate. Banks usually will send you a notice before your CD matures asking what you'd like to do. Consider your options when rolling over -- you might find a better interest rate with a CD that has a different term, or one from another bank.

CDs are less liquid than a savings account. You must deposit the full amount when you buy the CD and can't add or withdraw funds during their fixed term. And you'll be penalized if you cash in your CD before it matures, typically by forfeiting some of the interest you've earned. Banks usually pay higher interest rates on CDs than on savings or money market accounts as an incentive for you to give up some liquidity. The highest rates are generally for the longest-term CDs, though there are some exceptions.

Historically, every CD had a fixed interest rate over its term. But today you can find CDs with variable rates, sometimes called market-rate CDs. Their interest rates rise or fall as market rates change over the CD's term. These CDs let you take advantage of changes in interest rates. If you buy a variable-rate CD when rates are low, as they are today, you won't miss out on earning more interest if rates go up. On the other hand, if you think rates will fall in the future, then it might make more sense to buy a fixed-rate CD to lock in a higher rate over its term.

Climb the CD ladder
A CD ladder is another way to generate a nice CD yield without locking up your money long-term, causing you to miss rate increases during the term of a long CD. A ladder can help you take advantage of rising interest rates. All you need to do is divide the amount you plan to invest into equal amounts and buy the corresponding number of CDs with different terms maturing in sequence. If you start out with four CDs maturing in three, six, nine, and 12 months, you replace the one maturing with a one-year CD, so you have an amount to cash in or reinvest on a regular schedule. You can create a longer-term ladder with CDs that mature on an annual basis to avoid locking in a low rate for a large amount of money. And you're not limited to using just one bank for a CD ladder. You can spread out your CDs over different banks, giving you the opportunity to pick the most advantageous rates.

Brokered CDs
Not all CDs are alike. Stockbrokers or other investment professionals also sell CDs, serving as a deposit broker for the banks that issue them. Brokered CDs may have a longer term than a CD you buy directly from a bank or credit union. However, they can be more complex and may carry more risk. Although most brokered CDs are bank products, some are designed as securities and are not FDIC or NCUSIF insured.

Also, you might have to pay a fee to buy a brokered CD, which could be a fixed amount or a percentage of the amount you invest. But if the fee is modest and the CD pays a higher rate than one you find at a bank, you may come out ahead. Many brokered CDs require a larger minimum amount to invest, as high as $10,000 or more.

Questions to ask about CDs
Here are five key questions to ask, before you buy a CD:

  1. What's the interest rate the CD pays and its annual percentage yield?
  2. Is the rate fixed or variable, and if it's variable, what triggers a rate adjustment and when does it occur?
  3. When does the CD mature?
  4. What's the penalty for early withdrawal, and are there exceptions to any penalties?
  5. Is the bank or credit union issuing the CD insured by the FDIC or NCUSIF?

Use FINRA's savings calculator to see how a consistent approach to saving can make your money grow. For more information about saving and investing, visit www.finra.org.

FINRA is the largest independent regulator for all securities firms doing business in the United States. Our chief role is to protect investors by maintaining the fairness of the U.S. capital markets. FINRA does not endorse, sponsor, or guarantee, nor is it sponsored by, any advertisers on this site, and any dealings with those advertisers are solely between you and the advertisers.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers