Investing in a high yield certificate of deposit (CD) can be one of the safest investments you can make. Most CD’s offer competitive interest rates compared to savings and checking accounts, making them an attractive short term investment. It is hard to go wrong stashing a portion of your savings away in these types of investments. There are however some considerations you should make before investing your money.
Here are a few tips that you should consider before investing your money into a certificate of deposit account .
5 Tips for Investing in a High Yield Certificate of Deposit
- FDIC Insured – Make absolute sure that any high yield certificate of deposit you may decided to purchase is backed by the Federal Insurance Deposit Corporation (FDIC). If you are investing your hard earned money into an uninsured CD, then you might as well be investing the money in the stock market instead.
- Early Withdrawal – Be sure to check if your CD has any early withdrawal penalty. If it does, then you should be aware that if you need access to that money in an emergency, you will be required to pay a fee. Since CD’s are not usually as liquid as a high yield savings account, you need to weigh all your options before investing your money.
- Fixed Interest Rate – Are you purchasing a fixed rate certificate of deposit or one that comes with a variable rate? Traditional CD’s come with a fixed interest rate that you can rely on. However, not all deposits are created equal and some come with an adjustable rate. Make absolute sure that you know which type of investment you are getting. You don’t want to be locked into a long term certificate of deposit only to find out that the interest rate is adjusting downward.
- Maturity and Call Dates – Do you know the difference between the maturity and call dates on your high yield certificate of deposit? Most people don’t look at any call date information when investing and barely review the maturity date. The maturity date on a CD is the date in which your investment fully matures and the funds are returned to you or reinvested back into a new deposit. The call date refers to the date in which the bank can “call back” the deposit from you. You will still receive your initial deposit along with the interest earned up to that date.
- CD Laddering – If you have a few thousands dollars to invest, then you should strongly consider building a CD ladder. Creating a portfolio of high yield certificate of deposits will provide a diversified and competitive investment. Traditional CD ladders normally spread across 5 different deposit accounts with expiration dates of equal distance apart. This insures that you are getting the best possible interest rates spread across your investments.
Passive Income Tip
Consider adding a high yield certificate of deposit to your passive income portfolio. Once you have completed your initial review of the investment, there is little action required on your part until the CD matures or is called back by the bank. Another option is to take the money generated from other income streams and use it to fund new CD accounts to setup a stable and safe recurring income stream.
