Unlike the stock market, where you can lose your life's savings, you can't lose with a certificate of deposit.
Offered by many banks and credit unions, a certificate of deposit is the best of both worlds. On one hand, you're getting a savings account. And on the other hand, you can take advantage of one of the safest investment options. With a CD, you're guaranteed the return of your money plus any interest you earn. If you're serious about saving, a certificate of deposit might be your best bet. These accounts feature better rates than a basic savings account. But before you get excited, you need to understand how CDs work.
By opening a CD, you promise to leave your money in the bank untouched for a specific period of time, which is why banks generously offer better rates for these accounts. However, opening a CD is only the first step to higher returns. You need to do everything in your power to maximize the return on your investment. The way you manage your certificate of deposit can be the difference between walking away with a little or a lot of money.
Here are three ways to get the highest return on your certificate of deposit.
Compare Different CDs
Just about every bank offers a CD, but this doesn't mean you should skip comparison shopping. The same way banks have different fees and guidelines, they also have different rates for certificate of deposits. To receive the highest return on your money, do your homework and compare rates offered by different banks and credit unions, including online banks. Your local financial institutions might offer a variety of CD products, but they might not offer the best rates.
Open a Long-Term Certificate of Deposit
Certificate of deposits can be a bit scary since your cash is inaccessible for the duration of the CD term, which can range from 30 days up to five years or more. Some people prefer short-term CDs since they're able to access their cash sooner. However, you'll earn a more favorable rate with a long-term CD.
Banks typically offer higher rates the longer you keep your money in the bank. For example, at the time of writing, a six-month CD with CIT Bank earns 0.45% APY, whereas a five-year CD earns 2.25% APY.
Maximize with CD Laddering
Laddering is another strategy to maximize CD returns. It's also the perfect technique if you don't want to tie up all your cash in a long-term CD. Let's say you have $6,000 to deposit in a certificate of deposit. Opening a single long-term CD may seem like the logical choice for the best return, but there's another alternative. You can ladder your money across multiple certificate of deposits. There's no rule that says you have to put all your money in a single CD. And oftentimes, laddering results in higher returns. For example, you can deposit….
- $2,000 in a one-year CD
- $2,000 in a two-year CD
- $2,000 in a three-year CD
After the one-year CD matures, take this money and open a new three-year CD, and then continue this cycle as each CD matures. With this approach, you can take advantage of the best rates available to you at the time. And since you'll always maintain a one-year CD in your portfolio, there's the opportunity to access your cash sooner and avoid any early withdrawal penalties.