Passive Family Income » certificate of deposit

5 Tips for Investing in a High Yield CD

John S. — Thu, 11 Aug 2011 11:13:56 +0000

Investing in a high yield CD can be one of the safest investments you can make. A certificate of deposit can 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 CD

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.

Related posts brought to you by Yet Another Related Posts Plugin.

What is a Jumbo CD?

John S. — Tue, 09 Aug 2011 10:40:07 +0000

A Jumbo CD (certificate of deposit) is a high yield investment that requires at least a $100,000 initial investment. In most cases, jumbo CDs are purchased by a larger institution instead of the individual investor. Because of their very high required initial investment, most of these certificate of deposit accounts are purchased by banks and pension funds looking for stable investments.

There are some opportunities for the individual who is interested in purchasing these types of investments, provided they have the required $100,000 in capital to invest. Check with your local bank, credit union, or online bank for more information on these investments.

Low Risk vs. Low Liquidity

Just like a traditional high yield certificate of deposit, jumbo CDs are considered a very low risk investment. As long as the total balance of the investment falls at or below the FDIC insured amount, the entire principal is guaranteed (see below for more details).

The major downside, or risk as some investors may claim, is that investing in any type of CD ties your money up. Unlike investing in a savings account or even stocks, a certificate of deposit requires that the money remain in the account until the agreed upon term has expired. Those who need access to the money in the event of an emergency would have to pay a early withdrawal fee in order to get access to their money.

Investing $100,000 and not having direct access to it for months or years may not be an option for the individual investor. In many cases, the extra interest that could be earned is not worth the risk of having an investment with low liquidity for the average person.

FDIC Insured

In the past, the FDIC (Federal Deposit Insurance Corporation) would guarantee up to $100,000 per depositor per insured bank. Since these certificates of deposit require a minimum deposit of $100,000, most accounts were never insured for anything over the initial investment amount for individuals.

Since that time, the FDIC now insures each depositor up to $250,000 per insured bank making a jumbo CD much more attractive then in the past. Now, most of these types of investments fall well below the guaranteed insured amount.

Comparison to Traditional CDs

So are these larger certificates of deposit worth it? In a recent search I ran on Bankrate.com, I compared the national averages for a 1 year traditional CD versus a 1 year jumbo CD and found the following results -

1 year CD – 0.67%
1 year jumbo CD – 0.71%

While not a huge difference, the national average for a jumbo CD earned 0.04% higher than a traditional one. On a $100,000 investment, you would earn about $40 more per year choosing the jumbo CD.

Final Thoughts

Choosing jumbo certificates of deposit as an investment may not be an option for most individual investors. The minimum $100,000 initial investment prohibits most of us from being able to take advantage of the higher interest rates.

However, for those investors who have the available capital and don’t mind tying it up for several months or years, jumbo CDs can provide a slightly higher rate. Now that these types of investments are FDIC insured for up to $250,000 (instead of $100,000), there is virtually no risk other than not having immediate access to your money.

Related posts brought to you by Yet Another Related Posts Plugin.

How Does a Certificate of Deposit Work?

John S. — Thu, 04 Aug 2011 10:32:37 +0000

Earning certificate of deposit interest is one of the easiest and safest ways to make passive income. While not the most glamorous investment option, a CD can provide a stable and guaranteed fixed rate of return in a troubled economy. So what exactly is a certificate of deposit and what does it do?

According to Investopedia, a certificate of deposit can be defined as – “A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.”

Let’s take a closer look at investing in a certificate of deposit based on the definition above.

Maturity Date

As the definition above states, all certificates of deposit come with a maturity date, unlike a high yield savings account. A CD will typically require the investor to keep their money in the account until the maturity date expires. While it is not impossible to pull your money out, there will usually be penalties charged for early withdrawal of the funds. Since a CD comes with this restriction, they normally offer slightly higher interest rates compared to other high yield investments like savings and checking accounts.

Bottom line – If you think you will need access to your money before the maturity date, then choose a different investment option.

Earning a Fixed Interest Rate

One of the major advantages of putting your money into a certificate of deposit is the guaranteed fixed interest rate that you will earn. Even while interest rates remain historically low, a CD can provide an investment option that gives you the piece of mind your initial investment will not be lost.

Investing in other high yield assets like stocks can definitely provide a higher rate of return (especially in this economy). However, for those investors who are worried about where the stock market is heading can take some comfort by earning a fixed interest rate through a CD.

Minimum Opening Deposit (Denomination)

There is a typically a wide range of required opening deposits for a CD and really depends on the bank or credit union. An Ally Bank Certificate of Deposit, for example requires a $0 minimum deposit to open up one of their high yield CDs (although I would recommend depositing more than $0). A credit union on the other hand may require a couple hundred dollars to open an account, whereas a special CD at a commercial bank may require a $1,000 initial deposit or higher.

Even if you only have a couple hundred dollars to invest, there are still options available on a high yielding certificate of deposit.

FDIC Insured

Most CDs are FDIC insured making your initial deposit guaranteed so you don’t have to worry about losing it. The FDIC now insures each depositor up to $250,000 per insured bank. So unless you decide to invest more than that amount at a single bank, your money should be safe. Just make absolute sure that your bank that you are taking out the account with is FDIC insured. If they are not, then you might as well be investing your money in the stock market.

Term of the Account

The terms of a certificate of deposit typically range between 3 months and 5 years depending on the bank or credit union. If you are looking to build a CD ladder, then you want to make sure you find a bank that offers deposit accounts in even increments (i.e. 1 year, 2 years, …, 5 years).

Some banks will offer a special CD account for its members with odd terms like 11 months. These accounts are typically special promotions and are not that common, but offer a more competitive interest rate.

Final Thoughts

Investing in a certificate of deposit is not the most glamorous way to earn extra income from your money. There are some disadvantages of investing in CDs like low rates of return during a recession and not having immediate access to your money. However, the guaranteed fixed rate offered by a high yield certificate of deposit can offer piece of mind to a nervous investor. Add in that most CDs are FDIC insured, and there is little downside risks to this investment option.

What are your thoughts on investing in a certificate of deposit?

Related posts brought to you by Yet Another Related Posts Plugin.

Five Places to Put Your Money So It Makes You More Money

Julie Mayfield (Staff Writer) — Mon, 06 Jun 2011 10:58:37 +0000

It takes money to make money. While there are exceptions, this old adage is generally true. So where should you put the money you have coming in so that it makes you more money? Here are five ideas.

Start a Small Business

Starting a small business can be an effective way to start a new stream of income. Many small business ideas can be done on a part-time basis and the capital investment can be small. Here’s a list to start you brainstorming. Consider which of the following might be a good match for your interests and abilities:

Childcare
Lawncare
Bookkeeping
Blogging or online content creation
Network marketing or party plan sales
Selling on eBay
Painting contractor
Cleaning service – residential or commercial

Invest for Dividends

Most people consider the payoff from investing in stocks to be an increase in the share price of the stock. Those are gains that are only realized when you sell the stock. But investing in dividend paying stocks will give you a stream of income in addition to any gains from increases in the stock’s value.

You can invest for dividends by buying stocks directly, or by investing in any number of mutual funds designed for that purpose.

And don’t be seduced by the biggest dividend payouts out there. L ook instead for stocks that have a long track record of increasing the dividends they pay each year, even if the initial dividend payout is lower.

Build a CD Ladder

Interest rates are at historical lows. And while that’s good for borrowers of money, it’s detrimental for those looking to earn interest on their deposits with investments like certificates of deposit (CDs).

One way to get the most out of your CDs is to create a CD ladder, which involves dividing the amount of money you have to invest among CDs with different lengths of time until maturity. (For example: one, two, three, four, and five-year CDs.) As each CD matures, you reinvest that amount in a CD with the longest maturity period.

CD ladders lock in higher interest rates for some of your money (the longer term CDs) and yet keep some of your money in shorter term CDs so you can take advantage of higher rates if they happen. And with interest rates so low, the only way for them to go is up.

Invest in Real Estate

Real estate investing is appealing to many and – for the right kind of investor – it can be a great way to make money from your money. Two common ways of generating cash flow from real estate are flipping houses and becoming a landlord.

Flipping a house involves buying it at a good price and then improving the property, holding it until it appreciates in value, or both. Flipping was an easier path to profits several years ago, when property prices were increasing year after year – or even month after month in some locations. That is no longer the case. But if you have a solid understanding of the real estate market in your area and some rehabbing skills, there are still deals to be made.

Another way of generating cash flow from real estate is to become a landlord. That involves buying property and leasing it out to others. Again, you will need to have a solid understanding of the real estate and rental markets in your area, as well as enough cash to purchase the property and a way to handle property management. If all those things are in place and the property cash flows (meaning rental income exceeds the costs of owning and maintaining the property) you could be sitting on an appreciating asset that also provides income.

Pay off Debt

Paying off debt may seem like an odd suggestion as a way to make money. But paying down debt can create an income of sorts with the principal and interest payments it frees up.

In fact, before investing in a small business, real estate, dividends, or even CDs, it makes sense to direct some of your current income toward getting rid of debt – especially high interest consumer debt like credit card balances. Once that is done, you can redirect your new found cash flow toward building income producing assets like the others mentioned in this post.

Where are you putting your money in order to make more money?

This post was written by staff writer Julie Mayfield.

Related posts brought to you by Yet Another Related Posts Plugin.

Helping Your Kids Become Financially Responsible

Miss T (Former Staff Writer) — Mon, 23 May 2011 10:45:19 +0000

Financial literacy starts at home. Lots of adults are racked with massive amounts of credit card debt, personal loan debt, and student loan debt because they did not learn the importance of being financially responsible at home. It’s not their parents fault. Often they grew up not learning about financial matters either. The good news is that you have a chance to start your kids off on the right foot by teaching them the importance of being fiscally responsible. One of the ways that you can do this is by starting them off on the right track with their own certificate of deposit.

Custodial Certificate of Deposit

A certificate of deposit is a time deposit that earns interest on a monthly basis. Interest is either compounded daily or monthly depending on the type of account. Certificates of deposits are attractive investments because they are guaranteed by the FDIC. This means that both the principal and interest are safe so you don’t have to worry about losing money.

You can give your child a certificate of deposit by setting up a custodial certificate of deposit. A custodial CD is one that is set up for the benefit of a minor. These CD’s accrue interest month to month just like a regular certificate of deposit. The only difference is that they require parental signature to withdraw funds. A custodial certificate of deposit can be opened at any bank, credit union, or brokerage company.

How to Open a Certificate of Deposit

Custodial CD’s are rather inexpensive to fund. Some financial institutions require as little as $100 to open a CD. Others may be seeking a minimum of $1,000 to open a new account. The average minimum deposit at most institutions is $500. Custodial CD’s automatically renew from term to term unless you notify your financial institution in advance that you would like to redeem the funds. This typically requires informing your bank 30 to 45 days before the maturity date.

Role of Custodial CD’s

Custodial CD’s are good for teaching your son or daughter about investing. Custodial CD’s pay a guaranteed interest rate throughout the life of the certificate of deposit. You can buy your child a CD with maturity dates ranging from 3 months to 5 years. A shorter duration CD from 6 months to 2 years may work the best.

This way you can help your child pick out the first CD. They can then make the determination whether to roll it over or go with a new certificate of deposit option. This helps your child to take control of the investment process.

Once your child reaches 18 years of age, you can remove yourself as the custodian of the CD and let them handle the funds. You can always keep the fund going or withdraw the funds. The money could be used to pay school tuition, school expenses, books, and for other educational needs.

A custodial certificate of deposit is a safe and effective financial product to introduce your child to the world of investing.

So, how have you been teaching your children about investing?

This post was written by staff writer Miss T.

Related posts brought to you by Yet Another Related Posts Plugin.