Investing in the current market volatility can be risky for some investors and they may look for safer alternatives. Meanwhile, those who are new to the investment world may seek low-risk investment vehicles to start their financial journey. If safety and a guaranteed return on investment are your priorities, consider expanding your investment portfolio with Certificates of Deposit (CDs).
A Certificate of Deposit is a type of time deposit offered by banks, credit unions, and other financial organizations. It has a fixed maturity date which ranges from a few weeks to years and a specified interest rate. The basic rule of CDs is the longer the term, the higher the interest rate.
CDs are considered risk-free investments backed by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per individual per bank. This means even if the bank were to go under, the FDIC would make sure you get back your initial investment along with any interest earnings. This level of safety makes CDs a great option for conservative investors.
Let’s delve into how you can increase your investment with a Certificate of Deposit.
1. Higher Interest Rates: Traditional savings accounts usually offer minimal interest rates. In CDs, however, the banks typically offer higher interest rates. Depending on the bank and the length of the CD term, the interest rate may be several times higher than that of a regular savings account.
2. No risk of Capital Loss: Unlike stock investments, where there is always a risk of capital loss, CDs guarantee the return of the principal amount whether the market goes up or down. This makes it a safer way of saving and growing your money.
3. Variety of Options: CDs come in a variety of options for different investment needs. You can opt for a traditional, variable-rate, callable, non-callable, jumbo, or IRA CD. A jumbo CD typically offers a higher interest rate because they require a larger initial deposit. IRA CDs can provide tax advantages as the interest earned is tax-deferred until withdrawal.
4. Compounding Interest: Some CDs offer the option of compounding interest where it is possible to earn interest on interest. By allowing your interest to compound, your total returns at the end of your CD term could be significantly more than with simple interest calculation.
5. Laddering Strategy: The laddering strategy involves buying several CDs with different maturity dates. This way, you can benefit from high-interest rates of long-term CDs and avoid tying up your entire investment for a long period. As each CD matures, you can reinvest the money into a new CD. This ensures a steady cash flow over time.
However, CDs are not without drawbacks. The trade-off for their safety and guaranteed return is that your money is tied up for the term of the CD. If you withdraw your money before the end of the term, you’ll likely incur a penalty.
In conclusion, a Certificate of Deposit can be an effective avenue to increase your investments, especially for conservative investors seeking a guaranteed and stable return. As with any investment, it is essential to do the necessary due diligence and understand how CDs fit into your overall investment portfolio. It’s always recommended to speak with financial professionals to help guide your investment decisions based on your financial situation, risk tolerance, and goals.