If you are one of the many who overpaid the federal government last year, then chances are you will be receiving a nice tax return very soon. What are your plans for this return? Are you going to splurge and take the family on a nice vacation or use it to buy that flat screen television you have been eying for several months?
What about putting your money to work for you instead of splurging this year? Did you know that investing your money in a certificate of deposit is one of the safest places to put your money that will pay you back? Earning certificate of deposit interest is one of the safest passive income opportunities that is available today.
Before you go out and blow your check, why not consider opening up a high yield certificate of deposit that can maximize your tax return?
Calculate Your Possible Certificate of Deposit Interest
Let’s say you are getting back a $2,000 Federal Tax Return this year. If you are willing to invest this money in a safe place, then you can start making certificate of deposit interest. Reviewing the latest high yield CD rates, you could earn $30.02 on a 12-month deposit (using the current 1.50% APY). A 5-year CD could bring you $317.85 in certificate of deposit interest if you are willing to tie up your money for a few years.
If you have gotten several thousand dollars in a tax return this year, you may also want to consider building a CD ladder. This type of investment usually involves opening multiple certificate of deposit accounts (usually 5) spread out across even time periods for the same initial amount. A CD ladder hedges against future interest rate changes, averaging them out over several investments.
As you can tell, there are plenty of safe options to put your money to work for you!
Downsides and Possible Risks
Earning certificate of deposit interest is one of the safest investments that you can make. The biggest possible risk is investing your dollars in an account that is not FDIC insured. Before opening any type of high yield account, be sure to verify it is federally insured to protect your assets in case the bank goes under.
One of the downsides of investing in certificate of deposits is that they are not as liquid as most savings or money market accounts. A bank will normally charge you a early withdrawal fee if you want to pull your assets out of the investment before it matures. Before investing any dollars, make sure you have enough savings and assets to cover your other expenses so you don’t have to rely on this money to survive.
Finally, some critics of certificates of deposits will argue that the interest on a CD can often be very low compared to other investments like stocks. It is true that during times of low interest rates that the return offered can be low (sometimes lower than 1%). This does not mean that you should ignore these types of investments entirely. Shop around and see if there is a special offer available that may be above competitors rates. You could also consider building a CD ladder that would provide a decent average return and hedge against future interest rate changes.
Final Thoughts
A return on your investment of $30.02 is not going to let you retire anytime soon. However, using your tax return (or any other windfall) as an investment can be the first step in changing your financial future. If you can build some momentum letting your money work for you (instead of you working for money), it will open your eyes to power of passive income!
What are you planning on doing with your federal tax return this year?
Related posts:
- How Does a Certificate of Deposit Work?
- Earn $75 Gift Certificate to Restaurant.com with Discover® Open Road Card
- 5 Reasons to Open a High Yield Savings Account
- Helping Your Kids Become Financially Responsible
- CD Ladders – When are They a Bad Investment?
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Another downside is that CD interest does not keep up with the real rate of inflation. So when you get your cash back, plus interest, you will actually have less purchasing power than you started with.
It is important to put away some cash reserves for a rainy day, and you should try to earn as much interest as you can on the money. Any interest+principal is worth more than blowing the money on foolishness though.
@Jade – You make a good point about inflation. While I think you can do a lot better investing in dividend stocks for example, a CD takes hardly any research and is a convenient way to invest your money that can earning some interest.
You could also purchase ten year Treasury Bonds right now who yield approximately 4% annualy. I have also been purchasing 30 year bonds yielding 4.50%. I know inflation is an issue, but then I don’t think it is that big of an issue as long as you are properly laddered and you have a bond expiring each year.
For example if I can save $1000/year I could buy a 30 year treasury bond yielding 4.50%. I could keep doing that for 29 more years, each year buying a $1000 bond. Then on year 30 I get my original bond and reinvest it into another bond. If you reinvest your interest you should more than keep up with inflation.
@Blogging Banks – I really like your thought process. Creating a Treasury Bond Ladder!
Good article. As mentioned my others, you need to look for yields that keep up with inflation. I can tell you what I am doing with my tax return. I am adding to my REIT Index mutual fund (Real Estate Investment Trust) and my High Yield Corporate Index mutual fund. Both have high yields. Right now, I have the dividends setup to be reinvested. The dividends keep compounding and really add up over time. My yield on cost is close to 10% (APY) for each. When I turn 55, I am going to have the dividend sent to me in cash (as opposed to being reinvested). I will get great passive income until I retire.
When do you think CD interest rates are going to rise? I remember they used to be in the 4 and 5% area and now they’re usually less than 2%. My 18 month CD is only at .70% now. Definitely not as high an interest rate as I’d like to see.
@Laura – I think it will be a very long time actually before interest rates go back up. I have a few CD’s expiring now that were actually above 5% which is depressing to see now. I can only try and make the best of it by looking to my credit union for the best available rates.
Certificates of Deposit are one of the safest investments you can make. First, they are the least risk of all higher yield accounts and they are insured by the FDIC just like any other bank account.