{"id":170197,"date":"2014-04-18T08:30:43","date_gmt":"2014-04-18T15:30:43","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=170197"},"modified":"2019-09-24T00:12:20","modified_gmt":"2019-09-24T07:12:20","slug":"best-cd-rates","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/best-cd-rates\/","title":{"rendered":"Best CD rates | Certificate of Deposit rates"},"content":{"rendered":"

Certificates of deposit (often simply called CDs), by definition are time deposits. You give your money to the bank and then promise not to touch it for a specific length of time. In general<\/em>, the longer you agree to let the bank keep your money via a CD investment, the higher the interest rate you will receive.<\/p>\n

If certificates of deposit offer higher returns than a savings account, then why doesn’t everybody use them? The primary reason is that a CD investment is less liquid than a savings account in that you can’t just move money in and out without penalty as you can in a savings account. You can<\/em> take your money out of a CD before it \u201cmatures,\u201d but you are docked interest when you do. In fact, it is typical for a bank to penalize the interest amount even if it hasn’t been earned (meaning you could lose part of your principal if you close your CD early).<\/p>\n

<\/span>Anatomy of a CD<\/span><\/h2>\n

I was fortunate to win a $1,000 6-month certificate of deposit from ING Direct recently. (I never win anything!) Looking at it might be instructive:<\/p>\n

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Reviewing this screenshot, you can see that a certificate of deposit has an initial value (in this case, $1,000), an interest rate (3.50%), and a term (6 months). In other words, this is very much like a loan that I am making to the bank.<\/p>\n

You can also see that the bank has an \u201cEarly Redemption Policy\u201d that states that I would sacrifice three months’ interest if I chose to redeem this CD early, whether the interest has been earned or not<\/em>. Because I have held the CD less than a month, I would actually sacrifice part of my principal if I were to close the account now.<\/p>\n

When this CD investment matures on April 9th, I will have $1,017.28. Obviously $17.28 isn’t a huge return, but it’s important to remember that interest rates are low right now. (Also consider that if my $10,000 emergency fund were all in CDs, I would earn $172.80 in six months.)<\/p>\n

Another important difference to be aware of is that, unlike a savings account, a certificate of deposit ends<\/em> after a set amount of time. What happens at the end of the term depends on the arrangements you have (or have not) made with your bank. (I explain this further below.)<\/p>\n

<\/span>CD Tips and Tricks<\/span><\/h2>\n

A certificate of deposit is a great way to put your savings on steroids, so to speak, but there are ways to make them even better. Here are a few tips and tricks that can help you get the most out of your investment.<\/p>\n

Use CDs to beat falling interest rates. When the Federal Reserve cuts short-term interest rates, you feel the pinch in your savings account. Certificates of deposit are a great way to buy yourself “protection.”<\/p>\n

When you see a rate drop coming, open another CD. For example, the Federal Reserve just cut short-term rates another 0.50 percent last week. I would be shocked<\/em> if banks didn’t follow suit, lowering the interest on their savings accounts. ING Direct could go as low as 2.25 percent.<\/p>\n

When you see an interest drop coming, take some money from your savings account and throw it into a 6- or 12-month certificate of deposit, locking in the higher rate. (My web research hasn’t revealed what causes CD rates to move, but they do not move in lockstep with savings accounts.)<\/p>\n

Climb the CD investment ladder.<\/strong> Just as you might use dollar-cost averaging to profit from fluctuations in the stock market, you can use a “CD ladder” to profit from fluctuations in interest rates.<\/p>\n

Say you have $5,000 to invest. To build a CD ladder, you would invest the money in CDs with staggered maturation dates:<\/p>\n