While other investment and savings vehicles may get higher returns, few are as reliable as the certificate of deposit. CDs are traditionally safe, solid investments. Let’s take a look at common ways to invest in them and add them to your portfolio.
A financial advisor could walk you through different investment options for your portfolio.
Certificates of Deposit Definition
A certificate of deposit is a low-risk, low-return investment usually offered through a bank or credit union.
When you buy a CD, you are essentially lending your money to the institution for a predetermined amount of time, generally between 28 days and 10 years. In turn, the bank or credit union agrees to pay you back the money when the CD reaches maturity, plus interest at a rate that is determined when you buy the CD. The longer the CD takes to reach maturity, the higher the interest rate will be.
While CDs are a very safe and low-risk investment, there is one major trade off — you don’t have access to the money during the life of the CD. If you absolutely have to have the money held in the CD, you can get it back — but there will be steep penalties. Again, CDs are a worthwhile addition to anyone’s portfolio, but make sure you are only putting in funds that you are ok not seeing until the maturity date.
Another thing to consider when buying a CD is how often the interest compounds — daily, monthly or yearly. The more often the interest compounds, the more interest you ultimately earn.
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How to Invest in Certificates of Deposit
Investing in certificates of deposits is fairly easy. If you already have a checking account with a bank or credit union, you can likely buy a CD through that institution, either by visiting a branch or using the app or website.
Your bank may not have the best rates, though, so it might make sense to shop around and find the best rates. If you want to buy a CD from a bank you don’t already have a relationship with, you’ll have to open an account, which generally won’t take long.
While buying CDs by yourself is fairly simple, if you want more help you can always work with a financial advisor, who can help you find the best rates and even buy the CDs for you.
One slightly more complicated way to use CDs in your portfolio is to set up a CD ladder. Essentially, this means dividing your money into multiple CDs which mature at set intervals. When one CD matures, you can choose to either use that money or to put it into another CD which takes its place at the top of the ladder.
A CD ladder makes for more frequent compounding, which results in more money for you. It also creates a flow of income for you, albeit likely a modest one. While you can certainly set up a CD ladder by yourself, it might make sense for you to get professional help with this, as it does involve a bit of timing you don’t want to get wrong.
A CD involves putting money into a bank or credit union for a set amount of time and getting it back at the end of the period, plus a small amount of interest. CDs can last anywhere from one month to ten years, with longer maturity periods having higher interest rates. You can buy a CD from the institution you already do your banking with or you can shop around for the best rates.
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