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How to Get the Best Return on Certificates of Deposit

The recent hike in interest rates isn’t carrying with it all bad news. Yes, we are paying a bit more for loans and credit cards balances, but we’re also getting back a higher return on federally insured investments.

What is a Certificate of Deposit? 

A Certificate of Deposit, more commonly known a CD, is basically a risk-free investment that’s offered to consumers by banks, thrift financial institutions, and/or credit unions each in a specific dollar amount that gains a pre-designated  interest rate.  Basically, you put your money into an account for three or six months, or one to five years, all your choice.  Your money gains interest in the guaranteed amount up through the maturity date.  Penalties are imposed in you take out part or all of your money of the CD too early.

And since the moneys are put into a bank/financial institution, all funds are guaranteed by FDIC for banks and NCUA for your friendly neighborhood credit unions, just like your savings account.

Getting the Best Return

There are thousands of so-called “professionals” out there who claim that they have the ability to predict where interest rates are going to go.  These economists, bond-fund managers, derivative traders amongst others track where rates have gone in a massive effort to “predict” where they are headed.  The truth is, unless you have a crystal ball, an accurate prediction is just as common as winning the lottery, and the odds for the latter are even probably better.  Yes, these folks make a lot of money doing nothing short of what the Psychic Friend’s Network did in the 1990’s- taking lots of guesses. And look like they know what they’re talking about.

Now don’t let this get you down- If you feel anything towards it, you should feel relieved! 

One rule of thumb for CD’s, or any form of investment or rainy day fund is in regards to putting all of your proverbial eggs into one basket- Don’t do it.  By splitting up your accounts in a way that makes it easy for you to keep track makes he most sense, don’t you think? 

Slow and Steady Wins the Race…

Let’s say that you have $5,000 that you want to stash away into a CD, you may want to think about splitting it up into 5 separate accounts. Since the longer you keep your cash with one financial institution will yield you the best return (as well as the highest penalties should you need to withdraw), you can take advantage of this by putting about $1,000 into a 5-year commitment.  The next step would be to put each remaining $1,000 into a 4-year, 3-year, 2-year and 1-year account.  Each level (or rung, as this is referred to as laddering) will return a different rate of interest, each will yield a steady return, and you’ll never be too far away from the money if you need it.  When your 1-year CD matures, simply redeposit the $1,000 into a 5-year CD, as your other certificates will have aged one year- your 2-year will only have 1 year left, the 3-year will have only 2 years, and so on.  Each CD will mature at the same time each year, so you don’t really have to worry about forgetting the date.  Maybe open them around your birthday to help with your system. In the end, you will not only have saved a nice little nest egg, but a lot of unnecessary nerve-racking days and sleepless nights as your funds are safely tucked away “In the Bank”.

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